The Telangana Commercial Taxes Department has issued Circular No. 1/2026 dated August 18, 2026, laying down comprehensive instructions governing the use of Artificial Intelligence (AI) tools and other third-party online platforms by departmental officers and staff. The circular permits responsible use of AI for certain generic and administrative purposes but imposes a strict prohibition on transmitting identifiable taxpayer information to unauthorised public or commercial AI platforms.

The instructions place particular emphasis on taxpayer confidentiality, data security and independent application of mind in quasi-judicial proceedings. Officers have also been warned that misuse of AI may result in disciplinary action, criminal liability and consequences under applicable data-protection laws. The circular has been issued under the reference of the Commissioner of Commercial Taxes, Telangana State, Hyderabad. 

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AI Use Not Prohibited, But Strictly Regulated

The Telangana Commercial Taxes Department has clarified that it is not opposed to the use of Artificial Intelligence by its officers. Instead, the objective is to ensure that AI is used responsibly without compromising taxpayer confidentiality, data security or the independent judgment expected from a statutory officer.

According to the circular, officers have been using AI-based tools for activities such as drafting discrepancy reports, notices and orders, besides analysing, translating and summarising case records. The Department recognises that such tools can improve the speed, consistency and quality of official work.

However, the circular draws a clear boundary between using AI as an assistance tool and allowing AI to replace an officer’s statutory judgment.

The Department has therefore adopted a regulatory approach rather than imposing a blanket ban. Officers may use AI within the limits prescribed in the circular, but taxpayer information cannot be disclosed to unauthorised external platforms and AI-generated material cannot be mechanically adopted in statutory proceedings.

Taxpayer Information Treated as Highly Confidential

The circular notes that officers of the Commercial Taxes Department routinely deal with sensitive information obtained from taxpayers in the course of their statutory duties.

Such information includes GST returns and annexures, financial statements, invoices, bank particulars, e-way bill information, intelligence inputs, audit records, investigation and inspection files, statements recorded during proceedings, legal opinions and internal Government communications.

The Department emphasises that this information comes into the possession of officers because of their official functions and is held in a fiduciary capacity on behalf of the State and taxpayers who are legally required to furnish the information.

The concern becomes particularly significant when information is entered into publicly available AI platforms. Such platforms may process information on servers controlled by private entities, potentially outside India. The circular points out that information submitted to such services may be logged, retained, reviewed by provider personnel or used for purposes such as model training.

Consequently, typing, pasting, uploading, scanning, photographing or dictating departmental material into an external AI platform is treated as an electronic transmission of the information to a third party.

Section 158 of TGST Act Cited as Statutory Bar

A central feature of the circular is its reliance upon Section 158 of the Telangana Goods and Services Tax Act, 2017, concerning disclosure of information by a public servant.

The circular reproduces Section 158 and highlights that particulars contained in statements, returns, accounts, documents, records of evidence and proceedings under the GST law are not to be disclosed except in circumstances specifically permitted under the statutory exceptions.

The Department takes the position that a private commercial AI service provider does not fall within the statutory exceptions merely because an officer uses the service for administrative convenience or to improve efficiency.

The circular specifically rejects arguments based on workload, shortage of staff or the desire to complete work more efficiently as justification for transmitting confidential taxpayer information to an unauthorised platform.

It therefore treats the disclosure restriction as a statutory confidentiality obligation rather than merely an internal departmental instruction.

Section 152 and Section 158A Also Highlighted

The circular further refers to Section 152 of the TGST/CGST Act, dealing with the bar on disclosure of information.

It explains that taxpayer information covered by the statutory framework cannot simply be transferred or used in a manner that identifies a particular taxpayer unless the law permits such disclosure or the prescribed consent requirements are satisfied.

The circular also refers to Section 158A, which deals with consent-based sharing of specified information. The Department uses this provision to underline that even certain forms of information sharing between Government systems are governed by statutory conditions and consent requirements.

Against this background, the circular takes a strict view of transmitting taxpayer particulars to private commercial AI platforms.

Confidentiality Obligation Is Personal to the Officer

One of the most significant aspects of the circular is its emphasis on the personal responsibility of individual officers.

Referring to Section 156 of the TGST Act, the circular notes that persons appointed under the Act are deemed to be public servants. The confidentiality obligations under the Act therefore attach to the officer personally and are not merely obligations imposed upon the Department as an institution.

The circular states that where an officer transmits taxpayer information to an external AI platform without legal authority or taxpayer consent, the act can result in personal accountability.

The fact that the information was transmitted during official work, or that the objective was to complete work faster, will not by itself absolve the officer.

Importantly, the circular states that the statutory prohibition does not necessarily depend upon proof that actual financial or other consequential damage was caused. The act of unauthorised disclosure itself is treated seriously.

Responsibility Cannot Be Shifted to Subordinates

The instructions also address situations where taxpayer information is entered into an AI platform by another person working under the officer.

The circular specifically refers to Personal Assistants, stenographers, data-entry operators, outsourced personnel and other persons having access to official records.

Where such a person acts at the instance of an officer or has access to records in the officer’s custody, the circular makes it clear that the officer remains answerable for the disclosure.

This means that an officer cannot avoid responsibility merely by arguing that the information was actually uploaded by a subordinate or support staff member.

Potential Disciplinary and Criminal Consequences

The circular identifies several possible consequences for unauthorised transmission of taxpayer information.

Disciplinary proceedings

Unauthorised communication of official information may constitute misconduct under the Telangana Civil Services (Conduct) Rules, 1964.

The circular further refers to the Telangana Civil Services (Classification, Control and Appeal) Rules, 1991, under which disciplinary proceedings, including major penalties, may be initiated.

Criminal liability

The circular also refers to Section 133 of the TGST Act, which deals with liability of officers and certain other persons for specified disclosures of information.

It states that wilful disclosure falling within the scope of the provision may constitute a punishable offence.

The circular additionally cautions that disclosure of official information may attract Section 5 of the Official Secrets Act, 1923, as well as other applicable penal provisions, depending upon the facts.

Data Protection Obligations Also Apply

The circular links taxpayer confidentiality with obligations under the Digital Personal Data Protection Act, 2023.

It takes the position that taxpayer particulars handled by departmental officers constitute personal data for the purposes of data-protection law and that the Department handles such information in its capacity as a Data Fiduciary.

Accordingly, the Department is expected to process such data for the purpose for which it was furnished and protect it through appropriate security safeguards.

The circular specifically raises concerns about transmitting taxpayer information to public AI platforms where information could potentially be stored, retained, accessed by third-party personnel or otherwise processed outside the direct control of the Government.

The circular also warns that unauthorised transmission may have consequences beyond the personal liability of the officer, including potential challenges to the proceedings in which the disclosure occurred.

AI Cannot Replace the Officer’s Quasi-Judicial Function

Another major component of Circular No. 1/2026 concerns quasi-judicial proceedings under the GST law.

The Department states that a notice or order issued under the GST Act is a quasi-judicial act and must reflect the officer’s own reasoned appreciation of the facts, evidence and applicable law.

The statutory power is vested in the notified proper officer. According to the circular, that power is coupled with a duty and cannot be abdicated in favour of a machine.

Therefore, merely obtaining a draft from an AI system and adopting it without independent examination is not acceptable.

The officer signing a notice, assessment order, adjudication order or appellate order must personally consider the relevant facts, evidence and law applicable to the taxpayer and the particular case.

AI-Generated Legal Errors May Make Orders Vulnerable

The circular specifically warns officers about the possibility of AI systems generating fluent but factually incorrect material.

Such errors may include:

• Non-existent judgments or fabricated case citations;
• Incorrect statements of the ratio of actual judicial decisions;
• Wrong section numbers;
• Incorrect notification or circular references;
• Misstatements of law; and
• Invented factual details.

The Department makes it clear that when an officer signs an order containing such AI-generated material, the responsibility for the resulting error rests with the officer who signs the order.

Accordingly, every legal proposition, statutory provision, rule, notification, circular and case citation appearing in an order must be independently verified against the relevant primary or authoritative source before the order is signed.

What AI Use Is Permitted?

The circular does not prohibit officers from using AI altogether.

Officers are expressly encouraged to use AI tools for generic legal and procedural research, provided the query does not contain identifiable taxpayer information or case-specific facts.

Examples include seeking assistance with:

• Understanding the text of a statutory provision;
• Asking a general question of law framed in abstract terms;
• Language improvement;
• Grammar;
• Structure of a draft; and
• General clarity of official writing.

However, officers are directed to frame queries in wholly hypothetical terms so that taxpayer identity cannot be inferred from contextual details.

Even where the AI query is generic, the output must be verified against the primary source before it is relied upon.

Departmental Databases Cannot Be Connected to External AI Systems

The circular contains specific technical restrictions concerning departmental systems.

No officer is permitted to connect, integrate, export or feed any departmental database, dashboard, report, return or extract drawn from systems such as GSTN, the Back Office application, the e-way bill system, BIFA or other departmental analytical tools into an external system, application programming interface, browser extension or plug-in.

The circular also specifically prohibits installation of AI-enabled browser extensions and plug-ins on departmental computers.

This restriction is intended to prevent automated or inadvertent transfer of departmental information to external AI services.

Personal Devices and Accounts Also Covered

The restrictions are not confined to Government-issued computers.

The circular expressly states that the instructions apply equally to an officer’s personal mobile phone, tablet, laptop, personal email account and personal cloud storage.

Departmental material cannot be transferred to a personal device or account for the purpose of processing it through an AI tool.

Thus, the use of a personal device does not create an exception to the confidentiality obligations applicable to departmental records.

Officers Directed to Delete Residual Taxpayer Data

The circular also contains a retrospective compliance requirement.

To the extent technically feasible, officers and staff are directed to delete taxpayer-related data that may have previously been entered into AI platforms.

This includes deleting associated chat histories and stored files and disabling settings that permit retention of inputs for model training.

The instructions further state that chat histories or files containing taxpayer information should not thereafter be retained on personal devices or official systems.

Supervisory Officers Given Monitoring Responsibility

The circular places responsibility not only on individual officers but also on senior supervisory authorities.

Additional Commissioners, Joint Commissioners and Deputy Commissioners are required to sensitise officers and staff working under their control and satisfy themselves through inspections and reviews that the instructions are being followed.

This creates a supervisory compliance framework rather than leaving AI-related data protection entirely to individual users.

Mandatory Acknowledgement From Every Officer and Staff Member

The Department has prescribed an Annexure-I acknowledgement to ensure individual awareness and accountability.

Every officer and member of the staff is required to acknowledge receipt and understanding of the circular.

The acknowledgement specifically records awareness that taxpayer particulars obtained during official duties are confidential and protected under Sections 152, 158 and 158A of the TGST Act.

The employee also acknowledges that taxpayer information must not be transmitted to public or commercial AI tools or third-party platforms that have not been expressly authorised in writing by the Commissioner of Commercial Taxes or the Government of Telangana.

The acknowledgement further records personal responsibility for unauthorised disclosure and recognises that disciplinary proceedings, prosecution and proceedings under applicable data-protection law may follow.

It also requires officers to acknowledge that notices and orders signed by them must reflect their own application of mind and cannot constitute mechanical reproduction of AI-generated text.

Instructions Come Into Force With Immediate Effect

The circular states that any deviation from the instructions, including disclosure of confidential taxpayer particulars on public or commercial platforms or issuance of orders reflecting non-application of mind, will be viewed seriously.

The directions came into force with immediate effect from August 18, 2026 and will remain operative until further orders.

The Department has also indicated that difficulties encountered in implementation, along with suggestions for creating a secure, departmentally approved facility for AI-assisted work, may be brought to the notice of the Commissioner.

Significance for GST Administration

The Telangana circular represents a significant development in the way Artificial Intelligence is being integrated into tax administration.

Rather than treating AI as inherently prohibited, the Department has drawn a distinction between AI-assisted work and AI-dependent decision-making. Generic research, drafting assistance and language support may be used, but confidential taxpayer data must remain protected and statutory decisions must remain the product of the responsible officer’s independent judgment.

For GST officers, the message is particularly clear: AI may assist the officer, but it cannot become the custodian of confidential taxpayer records or the substitute for the officer’s statutory application of mind.

The circular therefore places two fundamental limitations on AI use within the Commercial Taxes Department: no unauthorised disclosure of taxpayer information and no mechanical adoption of AI-generated material in quasi-judicial proceedings.

The framework also makes individual accountability central to compliance. An officer cannot rely on official purpose, workload, efficiency considerations or delegation to another staff member as a defence against an unauthorised disclosure.

With the instructions covering public AI platforms, browser extensions, departmental databases, personal devices, cloud storage, legal citations and quasi-judicial orders, the circular establishes a broad compliance framework for the responsible use of AI in Telangana’s GST administration.

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