World has paid a heavy price for trust, transparency, controls and accountability.

Globally there is a decent shift in tax regime, countries in middle east are now introducing tax (VAT Value Added Tax). One of the most populous country in the world India shifted its tax regime from multiple taxes to just one tax which is GST (Goods and Services Tax). Countries are redefining laws and policies time and again to manage their respective fiscal setup.

Taxation Quandary

With continuous change in policies and procedures of very complex framework of direct and indirect taxes, governments and authorities are having obstacles to roll out and make sure implementation is in completeness. Incumbents in private and government sector find it difficult to interpret taxation and thus the parallel industry of tax advisors, consultants, legal advisors etc is supporting both regime as well as the incumbents. As per Richard Murphy’s (tax campaigner) research, total global tax evasion is 5% of global economy. Tax evasion is as huge as 33% of the GDP in continental Europe. Size of the parallel economy in many countries is same as the real economy in many countries.

Taxation and management of taxation have major impediments and this leads to numerous hurdles in implemented or about to be implemented tax framework. Major drawbacks in tax regime are

1. Complex rules 2. Transparency in tax transactions 3. Trust between incumbents and authorities 4. Controls in terms of leakages, alteration and tampering. 5. Accountability though stiff on incumbents but no or minimal accountability on

authorities

This led to development of parallel economy through

1. Frauds in account receivable and account payable. 2. Tax evasion 3. Corruption 4. Smuggling of goods and services. 5. False and fake representations of organisations and its subsidiary companies.

Blockchain an alternate to Taxation Quandary

In today’s complex world cost of a transaction is multiplying. A small transaction may sometime cost higher than the value of the transaction specially when there are rebates and subsidies specially government transactions. A transaction has to go through various intermediate setups for validation before it actually gets executed. Intermediate setups include reconciliation, validation and record keeping.

Blockchain is a distributed ledger technology which allows all linked authorised parties to modify/edit/append the transactions relevant to them as per their respective access levels. Google Docs is classic exemplification of blockchain, wherein only authorized users can edit/view the document.

Blockchain is a contextual need to refine, define, create new ways of creating and maintaining taxation.

How taxation works in today’s world:

Broad level taxes can be categorized into Direct and Indirect Taxes

Tax computation and settlement is a very complex process

Let’s take a direct tax first to understand the flow on how direct tax computation and settlement happens.

Direct Tax Flow

Now here sources of income/revenue is through different sources and it’s tedious to pull out data from all sources and computational process is pretty complex. Then payment of excess / short taxes is another complex process to refund/recover.

Indirect taxes Flow

How Blockchain works

Almost every transaction requires an intermediary as of today (except non-conflicting emotional personal non-tangible transactions between yourself and your wife or family or friends).

According to the Bank of England, a blockchain is “a technology that allows people who don’t know each other to trust a shared record of events”. This shared record, or ledger, is distributed to all participants in a network who use their computers to validate transactions and thus remove the need for a third party to intermediate.

Now what blockchain brings here is peer to peer connect, which is primarily lead by blocks which forms the chain of blocks. Now let’s understand this in context of closest and the most relevant illustration. Google docs is a setup wherein two or more people can transact on a document with capabilities of access levels everyone who have access to it. Users of the docs who don’t have access to write can view it but they

cannot tamper it. Blockchain works on a distributed ledger model that records every transaction and maintains the chronology and authenticity of that information on a secure global network designed to be tamperproof. The technology allows transacting parties to interact seamlessly, eliminating recordkeeping activities across procure-to- pay, order-to-cash, and record-to-report processes.

Blockchain in Tax and Governance of Tax

Tax is law of the land and must be adhered to by organisations and individuals for all the products and services consumed. Fundamentals of Tax is record keeping and it marries off with blockchain right away as blockchain fundamental is record keeping. Now for centuries transactions became complex just because transactions lacked

transparency, trust and accountability. And that’s when the role of intermediate setups evolved and flourished.

Blockchain implementation in tax definition, collection and governance will wipe out lot of bureaucratic processes. It will create lot of efficiencies between government and public at large (individuals, corporates, service providers, manufacturers and supply chain). Blockchain as peer to peer setup can be good business case tax barter system as well.

Smart contracts have the potential to connect lot of dots which are lying in isolation. Smart contracts can be established across the ecosystem of individuals, corporates, service providers, manufacturers and supply chain. Smart Contracts should define tax collection terms, calculations and legal terms and connect to each stakeholder to settle and manage tax.

Now this will establish

Transparency

Stakeholders at large will have traceability of all transactions committed and where all in supply chain it is utilized. Tax authorities can update the smart contracts with all committed transactions and tax liability against interested party. This will eliminate lot of redundant processes and paperwork. All cross border and within border transactions can be monitored and managed.

Trust

Leakages across the manual system can be plugged as Smart Contract will be moment of truth as none can tamper it and it is secured. Controls are underlying features of blockchain wherein access to permissioned networks is restricted to identified stakeholder. Ledger cannot be tampered, edited or modified unless stakeholder has access to it.

Accountability

Blockchain will create accountability as transactions will be transparent to all the incumbents as trust factor will be created on execution of transaction. Real time information will be available to process and subjugate.

Blockchain will be pretty useful tool for governance, monitoring and ideation of taxation which will connect dots and make it easy, tamper proof, accountable system for taxation. Value of the implementation has to be worked out considering administrative overheads, collections of tax and the processes involved etc.

Blockchain has all the potential to lower costs between businesses, business to consumer and business to government. Someone out there has to take a call and answer couple of questions to derive the value of implementation and start the implementation.