How Tax is Driving Digital Transformation In Finance and Accounting?

These days, digital transformation isn't restricted to businesses only. To boost their revenues and close down tax loopholes, governments across different parts of the world are applying digital transformation and putting pressure on companies to respond. The digital transformation of governments hassled to the creation of new regulations for collecting maximum taxes within a minimum span of time and abolish tax fraud. These regulations are pressurizing finance professionals to upgrade vital processes like buying and selling and also make sure that back-end systems are built for ensuring consistent results in processing transactions. Here are some ways in which tax is bringing about a digital transformation in finance and accounting-

Digital Transformation of The Sales Process

When it comes to digital transformation, tax authorities have gone ahead of companies from which they acquire taxes. The trend, which started in Latin America, has now become a global phenomenon, and governments have made it mandatory for companies to track VAT on their sales in real-time. Therefore, a retailer needs to keep track VAT on every sale, irrespective of its size. Once a customer makes a purchase, the retailer shares the details of the sale to a government database that confirms that the amount of VAT charged is correct or not and sends a receipt to the retailer.

The retailer then sends the electronic receipt to the customer. The entire automated process happens in real-time. E-receipts have a good effect on environmental sustainability by presenting the possibility of eliminating paper from the sales process. Therefore, retailers will have to completely change the way in which they handle sales transactions, venturing into a completely automated system and abolishing manual or paper-based processes. This is a change which has transformed the vital component of retail-the individual sale.

Compliance In Buying

The digital transformation of governments is also overturning the purchasing process of all businesses. In 60 countries across six continents, governments have abolished paper invoices for both sent as well as received shipments. They are authorizing electronic invoices, known as e-invoices using which tax authorities can track in real time. Businesses will now have to comply with e-invoicing mandates or be exposed not just to the risk of financial penalties but also delayed or cancelled shipments to and from suppliers, which can have a detrimental impact. In some countries, some businesses have been already shut down by tax authorities for non-compliance.

Another interesting thing to note is the fact that governments have brought strict regulations on electronic signature formats for e-invoices and how all companies including the ones that offer accounting services store e-invoices. Failure to utilize the proper signature format can cause delayed shipments and penalties. Companies also need to store invoices carefully and provide access in case the government wants to perform an electronic audit. Maintaining obsolete processes is therefore not an option.

Modernization of The Back-End Systems



Complete changes in sales and purchasing have led many businesses to reconsider the design of their back-end systems. The presence of dissimilar, disconnected appliances is risky in a tax environment which needs real-time responses to be made. Digital transformation of the taxation system has forced the modernization of back-end capabilities. Companies need agile, cloud-based solutions to centralize and regulate transaction processes which fail to keep up with the speed of the changing government regulations and the changes these regulations are bringing.

As ERP providers are offering a new wave of cloud-based solutions, businesses now have to take this opportunity to upgrade the apps which run their transaction engines. Consistency is a major factor. Sales and purchasing systems need to use trustworthy, repeatable processes for every transaction, and also track and store these details in compliance with government regulations. Speed is also an important factor as some retailers need to process a large number of transactions at the same time.

Centralization and Automation of The Accounting System

Apart from upgrading back-end functions, businesses need to think according to the changing trends. Establishing new business units to work separately is not a wise approach to handling the challenges created by the digitization of the taxation system. Companies, therefore, need to create a centre for excellence for tax preparation services which brings people from different departments into a single united operation. This centre for excellence approach emphasises the importance of taxation as a vital operation for any business.

Automation of tax processes adds another layer of defence as companies want to stay safe from penalties, audits and other consequences of mismanaging tax operations. Governments are implementing digital transformation to apply tax policy at full speed. Finance and accounting professionals also need to do this to ensure that they are compliant with government regulations and ensure that the tax operations of their business process run in a smooth and efficient manner.

Author Bio: Alkhadim LLC is an Accounting Firm in UAE and is associated with one of the top tax preparation services companies based in UAE. We write on emerging trends in the taxation system in the UAE and other parts of the world across leading websites and publications. The views expressed in the article are based on his personal observations.