GST 2.0, AI and the MSME Digital Compliance Divide

Abstract India’s Goods and Services Tax (GST) has undergone a paradigm shift from being just a digital reporting mechanism to a comprehensive technology-enabled ecosystem of filings, documentation, reconciliation, and validation and is now witnessing a rise of data-centric processes. While enabling transparency, standardization, and control, this has also created its own set of compliance challenges and risks for micro, small and medium enterprises (MSMEs) which are not at par with their large counterparts in terms of technology, financial and human resource capabilities. This paper explores the linkages between GST digitalization, new technologies in tax administration, and GST compliance capabilities of small businesses. It takes a dual perspective – while on the administrative side GST digitalization, analytics and risk management has had a positive impact on tax administration, on the taxpayer side it has increased the compliance costs with associated challenges in terms of skills, software, professional support, time and working capital.This paper uses an exploratory mixed method approach to understand the dynamics of GST compliance in the digital era through the perspectives of stakeholders – businesses/ taxpayers, GST professionals and revenue authorities in Nagpur. Findings reveal that while digitalization of GST has led to improvement in administration, there are still compliance challenges like complex filing procedures, frequent changes, technology-related issues, input tax credit disputes and reliance on professionals in the surveyed businesses. The businesses in the sample of 70 respondents who responded to the taxpayer questionnaire had 68.75% reliance on GST professionals. The professional respondents(20) on the other hand felt that there is a need for constant upskilling while the revenue officials felt that their processes have improved but there are needs in terms of human resources. The paper conceptualizes the challenges in terms of a new Digital GST Compliance Divide and argues that apart from the more obvious access to technology divide, there is also a need to consider taxpayers ability to deal with a more digitized GST regime. It makes the case for looking at efficiency and effectiveness of GST 2.0 through a wider compliance capability lens and suggests MSME-centric measures like assisted compliance, pre-filing validation, explainable AI, human intervention and monitoring of digital compliance capabilities.