So i found that its mandatory to check the enable smart tags checkbox on the folder in case we want to add tags automatically to assets as soon as they are uploaded.
I read it somewhere that updating the DAM asset workflow is optional but its not.
For smart tagging to work automatically, one must enable the checkbox option on folder properties and update the DAM update asset workflow as well.
If smart tags step is added but the enable smart tags checkbox is unchecked then it does not add smart tags.