Man working on computer

The promise and limitations of information technology for tax mobilization

Oyebola Okunogbe, Economist in the Human Development team of the World Bank Development Research Group
Fabrizio Santoro, Research Fellow, the International Centre for Tax and Development
Celeste Scarpini, Post-Graduate, University of Sussex

As digital technologies continue to gain momentum in lower-income countries, tax authorities are increasingly adopting technology solutions to improve their core functions and to collect revenue more efficiently.

Our recent paper reviews recent literature on the use of technology for tax administration. Technology has the potential to improve tax collection in three areas: identifying the tax base, monitoring compliance, and facilitating compliance. But even the most user-friendly technology cannot function without basic infrastructure and a stable internet connection. Resistance from taxpayers and collectors, an unsupportive regulatory environment and lack of strategy for adoption by institutions also hinder the potential benefits of new technology. In this blog, we propose reforms to ensure investments in new technology improve efficiency and revenue collection.

Potential of technology in taxation

Technology can transform three core functions of tax administrations:

However, there are barriers to realising technology’s full potential.

Technology limitations and how to address them

  • Infrastructure: If hard infrastructure, such as electricity and a stable internet connection, is missing, or if the technology chokes or crashes in peak periods, or functions only intermittently, this can lead to user frustration. In addition, because small-scale, rural and less educated taxpayers have limited internet access, they are the most negatively affected by inadequate infrastructure. Tax authorities could reach these groups of taxpayers with limited internet access by offering use less sophisticated technologies such as offline declaration and payment solution using non-smart phones.
  • The Human Factor: Taxpayers and tax officials may resist the introduction of new technology for varied reasons: lack of awareness and training, high adoption costs or loss of opportunity for corruption and avoidance. On the one hand, more sophisticated taxpayers could exploit loopholes in the technology to avoid taxes. On the other, less IT-savvy taxpayers may mistrust the new solutions. Different approaches should be followed for such taxpayers, with increased enforcement and vigilance on the former and trust-building for the latter. At the same time, tax officials may prefer using manual practices due to entrenched habits and fixed mind-sets, rent seeking and lack of awareness. This can be tackled through an adequate change management strategy, as well as targeted training and assistance.
  • Institutional Strategy: The effectiveness of new technologies can be significantly hampered where there is no strong buy-in from key leaders, and no long-term national strategy. To run smoothly, sequencing of technology adoption is also crucial since many functions are inter-dependent. For example, a new integrated and automated tax administration system is unlikely to succeed if the pre-existing data are not first properly cleaned up. Likewise, retraining tax officials should precede introducing the new technology and continue after the launch.
  • Regulatory Framework: Data sharing between revenue authorities and public and private actors does not happen systematically, often due to privacy and confidentiality concerns. Policymakers can set up a central automated platform which would be accessible from multiple government institutions and banks to identify taxpayers and crosscheck information. Lastly, as technology evolves, regulatory frameworks should be updated for cybersecurity to preserve privacy and confidentiality and to protect citizens from data leakages.

Policy and research agenda

As technology develops at a faster and faster pace and its role grows in tax administration, the availability of administrative tax data will only increase. Tax authorities can seize this opportunity by collaborating with researchers to evaluate the impact of technology interventions, guide their expansion or modification, and understand their efficiency and equity implications. Such collaboration could also be beneficial to upgrade the capacity of staff in tax administrations to use data analytic tools.

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