At What Cost? Curtailing Tax Evasion in a Digital World

This paper estimates the economic impact of digital tax enforcement by exploiting a large-scale reform in Pakistan that requires firms to electronically file transaction level details of their sales and purchases along with their value added tax (VAT) returns. Using administrative tax data and a purpose-built firm survey, we estimate the causal impacts of the reform on tax compliance and the associated compliance costs. We find that VAT remitted by treated firms increases by nearly 30 per cent, primarily due to reduced input tax claims. However, the compliance costs of filing the transaction-level details are substantial, especially for small- and medium-sized firms – being in excess of their VAT liability on average. Our findings challenge the optimistic narrative underlying the rapid global adoption of digital compliance measures, such as e-invoicing. While these interventions do generate additional tax revenue, the compliance costs they impose are substantial and highly regressive. Governments need to consider these costs when designing digital enforcement measures.