THE 5 TYPICAL STAGES IN TAX TECHNOLOGY

[Ramnarayan Balakrishnan]

Tax Technology is the Future, given that the legal complexities of the tax legislations of the various countries are getting watered down and the compliance process is gaining more and more importance. Automation of the Indirect Tax Process is a one-time effort/ expense for any organization which can be recovered over a period of time, while a stabilized process would need very less human intervention, which would result in substantial employee cost savings in the long run.

The Tax Technology process can broadly be classified into 5 stages, as explained below:

The First Stage is predominantly Continuous Tax Research, which is basically a Tax Expert’s job. Typically, companies selling data support the tax rates applicable to various products/ services as well as the place of supply logic in various countries and the states within these countries.

The Second Stage is Content Creation/ Development which could be of two kinds. The above research is converted into templates which the software created by the data selling company understands and is uploaded into the system. Typically, the place of supply logic written by the tax expert, which works in conjunction with the tax rates, would need to be coded by a software programmer.

The Third Stage is Testing. After all the tax research data has been uploaded in the appropriate formats/ templates into the system along with the coded place of supply logic, extensive testing is carried out in the Sandbox(es) to ensure that the results are aligned with the law and logic. Sample Tests are carried out during the limited time window made available in the Production Environment also. The processed data is sent in the form of software patches regularly to the clients, which leads us to the Fourth Stage.

The First 3 Stages are typically carried out by data selling companies like Thompson Reuters, Avalara, Vertex, etc.

The Fourth Stage involves Configuration and Integration of the Data Patches received during Stage 3 with the ERP package of the client who uses the software. This could be considered as a miniature of a complete ERP implementation process and is carried out using certain software tools which are typically provided by the data seller. The data which flows into the ERP system from the software patch would in turn be the basis for invoicing by the client. This Configuration/ Integration process is handled by the data selling company itself, or by various software companies/ Big 4 firms.

The Fifth and Final Stage is the Tax Tool Stage. The data which goes into the invoicing during the Fourth Stage is kept as the basis and the Tax Tool takes care of all compliance requirements such as Returns, Annexures, Generation of Reports such as Sales/ Supply Registers, Purchase Registers, Refund related data etc. This is a very critical stage from the perspective of tax laws, since the returns and other data are sent to the Government and optimum care has to be exercised to ensure that the information is accurate. There are many such Tax Tools available in the market, developed by software companies, Big 4 firms, and even the data companies.

The above stages have been made as concise and simple as possible, but conversion of law into logic is highly complex, since the minds of a tax professional (who is not a programmer) and that of a software programmer (who doesn’t know much taxation) have to be on the same page and work with perfect harmony.

Thoughts on the above article are most welcome.

Discussions to this article

[RajeshKumar C]

Crisp and clear walk-through of the process by the Author. Robust implementation of automation mechanism will ensure seamless compliance with ever changing tax laws and in a dynamic business environment. Interestingly, there's lot of scope for learning and continuous improvement.