Tax digitalization: building a trusted ecosystem through a common vision
Lucy Nshuti Mbabazi, Prerna Saxena and Oswell Kahonde
The responsible and effective digitalization of tax payments has the potential to deliver major benefits for governments, businesses, and individuals.
For governments, digitalization can lead to cost savings by improving administrative efficiency and operational productivity, increasing net revenue.
As Dr. Vera Songwe, Under-Secretary-General of the United Nations Economic Commission for Africa, highlighted during the Pan-African Peer Exchange, tax digitalization holds immense potential for economic recovery from the pandemic: “Digitizing tax payments and related processes can raise additional resources for African governments to fight COVID-19 and help move the countries back to growth”.
For taxpayers, digitalization can reduce voluntary compliance costs, and boost trust and confidence through greater transparency and accountability.
In 2019, the Alliance investigated Success Factors in Tax Digitalization in three countries (Indonesia, Mexico, and Rwanda) digitalizing their tax administration systems to increase domestic revenue.
48% the Mexican government saw a 48 percent increase in tax revenue by streamlining revenue collection
One key observation was that in many countries small and micro merchants are often reluctant to engage with digital payments due to fear of taxation. We connected this research to an Alliance-led Working Group on Merchant Payments Digitization in Mexico. This working group built on the efforts of the Mexican government to streamline revenue collection, including mandatory e-invoicing between 2012 and 2017, driving a 48 percent increase in tax revenue from goods and services. This increased the tax-to-GDP ratio from 12.6 percent in 2012 to 16.5 percent in 2019.
In Indonesia, the Directorate General of Taxes promoted digitalization to encourage taxpayer compliance, achieving a 20 percent reduction in business tax compliance time between 2014 and 2019. In Rwanda, tax reforms combined with investments in digital tax services between 2010 and 2020, increased the tax-to-GDP ratio from 13.1 percent to 15.9 percent and led to 14 percent average annual growth in revenue collected from 2010 to 2018.
India is also embracing digital transformation in tax collection. Having implemented arguably the largest-scale tax reform with the introduction of the Goods and Service Tax, the Government is now pioneering “stack” infrastructure, defined by its interoperability and building on Aadhar, the national unique identification system.
Achieving this success was neither easy nor smooth. Three key learnings emerged:
- Invest in a strong and resilient foundational tax system
Designing a comprehensive tax administration system is a complex task. Not only must it cater to multiple needs of revenue authorities and taxpayers; to build user trust, it must also efficiently manage high transaction volumes, complex calculations, and time-bound responses. Taxpayers expect clear communication, prompt confirmation of receipts, and quick resolution of complaints. But there is also an opportunity for proactive, user-centered design features, such as advance payment incentives to avoid high transaction volumes around payment deadlines.Fully digital payment methods are much less costly to administer, and typically enable taxpayer accounts to be updated more quickly. For banks, too, digital processing costs are much lower than those associated with cash or check payments. But it may be necessary to merge multiple tax administration functions into one comprehensive system. Our members Indonesia and Rwanda have emphasized the importance of leveraging legacy systems rather than re-inventing the wheel. In Indonesia, tax payments can be made at regular and mini-ATMs, and through e-banking.
- Embrace a comprehensive change management program
Implementing a digital tax administration system is a mammoth task that requires open-mindedness and flexibility. Internally, tax department employees may have concerns about new skill requirements, or even job security. Externally, taxpayers may doubt a digital system’s ease, transparency, and reliability. Addressing these concerns requires a comprehensive change management system.The Rwanda Revenue Authority invested heavily in staff training, including identifying tech-savvy employees as early adopters and ambassadors for the system. Front-line staff were newly trained as compliance officers and customer service officers. Indonesia offered a competitive remuneration scheme to recruit and retain highly skilled staff.Comprehensive change management should also extend to taxpayers. Sustained and clear communications are critical to building confidence in the digitization journey. Proactive, timely information prevents missed deadlines and subsequent penalties, helping establish trust. The utmost care should be taken to prevent algorithmic biases or technical errors damaging taxpayers’ trust. The complaints process should also be transparent and prompt.
- Forge private sector partnerships and leverage data for better service delivery
Partnerships with the private sector including fintechs, banks, and micro-finance institutions have been effective in obtaining user feedback and developing prompt and effective recourse mechanisms. In Indonesia, public APIs have enabled tax authorities to expedite new services to taxpayers. Through private sector partnerships, Indonesia provided taxpayers with greater access to value-added services such as tax liability estimates and advance payment reminders. Tax payments worth around IDR 100 trillion (US$6.43 billion) were processed through the OnlinePajak application in 2018; approximately 5–10 percent of the country’s total tax revenue. Emails encouraging payment, designed by a Behavioral Insights Task Force, resulted in the collection of an additional US$13.53 million in 2017 alone. COVID-19 has encouraged an even greater focus on the digitization journey. According to Iwan Djuniardi, Director of ICT Transformation at DJP: “With the pandemic, we are forced to go through these digital transformations”.
A shared vision for tax digitalization is important in establishing an effective, user-centric tax system, so supporting regional and municipal tax authorities in their digitization journeys is essential. Institutions involved may have varying levels of digital maturity, so providing tailored support is also key to obtaining commitment from all.
While payments are just one component of the highly complex end-to-end tax collection process, tax digitalization – when designed and implemented effectively – has the potential to deliver major benefits for society, reduce inequalities, and contribute to the financing of the SDGs.