Refunds Slow as Fraud Investigations Ramp Up

India's tax authorities are facing longer income tax refund delays in the 2025-26 fiscal year, with the average processing time reaching 35 days, the highest in three years. This slowdown follows intensive investigations into fraudulent deductions and fake donation claims, particularly those filed under Section 80G of the Income Tax Act. Investigations starting in July 2025 uncovered many incorrect or fabricated deductions. As a result, nearly 2.7 million refund applications took over 90 days to process, a significant change from previous years when average refund times had dropped to 17-21 days by 2024.

CBDT Encourages Revisions Amid Discrepancies

The Central Board of Direct Taxes (CBDT) responded by encouraging taxpayers to voluntarily review and revise their returns instead of immediately scrutinizing all questionable claims. This 'nudging' strategy led to over 5 million revised filings, with taxpayers voluntarily reducing their refund claims by approximately ₹2,000 crore. This move marks a shift towards boosting voluntary compliance.

AI Tools Gain Traction Globally for Tax Integrity

A parliamentary panel has urged the aggressive use of AI-driven risk-scoring algorithms, acknowledging that manual checks struggle with large-scale fraud. Around the world, tax authorities are increasingly using AI to detect fraud and evasion. AI systems can quickly scan large amounts of data to spot suspicious patterns and identify high-risk cases, helping tax bodies focus resources more effectively and improve audits. This technology is considered vital for modernizing tax systems, with the potential to speed up refunds for honest taxpayers while allowing closer examination of risky claims. Countries like Greece and Spain are already using AI for financial data analysis.

Challenges Remain Despite AI Push

However, the current delays point to ongoing issues in tax administration. Widespread fraudulent claims, possibly involving organized groups, show persistent problems with tax integrity. While AI is powerful for detection, its success depends on good data, constant updates, and addressing privacy concerns. Human oversight remains important for complex judgments, meaning AI is a tool to assist, not replace, people. The complexity of deductions, like those under Section 80G, also creates opportunities for misrepresentation. The contrast between the current 35-day average and the previous 17-21 day processing times highlights a significant step back from efficiency.

Tax System Modernization Drives AI Adoption

Integrating AI into refund processing supports wider efforts to modernize India's tax system. Lawmakers are reviewing and revising tax laws, like the Income Tax Bill 2025, to simplify regulations and improve the ease of doing business. Recommendations include faster tax case resolutions and streamlined processes. Initiatives like the Taxpayers Charter also aim for more transparency and fairness. These efforts collectively seek to build trust and encourage voluntary compliance, with AI expected to help speed up refunds for legitimate taxpayers and deter fraud.