The digitalization of tax administration promises improved efficiency and increased tax revenues. In recent years, the information trail of the value-added tax (VAT) has been digitalized in many developing countries.
We evaluate the impact of introducing an e-invoicing system in Uganda using administrative tax data in a synthetic difference-in-differences framework. To identify the effects on firms’ reporting behaviour, we exploit a policy change that exposed a subset of VAT-registered firms to stricter enforcement of the e-invoicing mandate.
We find that treated firms reduce their reported purchases by 43 per cent and increase their reported VAT liabilities by nearly 150 per cent, and the effects appear to grow over time. The effect on VAT due is primarily driven by reduced input VAT claims, and a related large decline in the size of negative VAT liabilities carried forward from previous periods. However, many firms in Uganda have large stocks of input VAT credits owed, and, on average, treated firms still have negative VAT liabilities by the end of our data period.
We also find that firms reduce reported sales by 39 per cent, which we interpret as indicative evidence of sales suppression as firms turn to alternative margins for evasion to manage the size of their VAT liabilities. On the extensive margin, we show that the introduction of e-invoicing has coincided with an acceleration in the number of taxpayers filing VAT declarations monthly, many of whom previously filed corporate income tax returns. This indicates that e-invoicing and related enforcement action have brought new VAT payers into the tax net.
