## Public Finance Goes Digital

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**Canonical URL:** [Public Finance Goes Digital](https://www.imf.org/-/media/files/publications/fandd/article/2018/march/gupta.pdf)

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### Overview
- Public finance is being reshaped by digitalization, which affects the informational core of tax and spending policies and enables both improved execution of existing policies and the creation of new ones.
- Key functions affected include: collecting information on incomes and employment, distributing benefits, forecasting revenues, and monitoring liquidity and borrowing needs.

### Rich troves of data and improved tax administration
- Electronic filing and standardized reporting reduce cost and complexity of compliance and processing.
- Access to third-party information enables tax authorities to prepopulate tax returns in some jurisdictions.
- Examples from the text:
  - Australia and the United Kingdom receive real-time data on wages paid by employers.
  - Brazil’s Public System of Digital Bookkeeping allows authorities to determine a company’s income tax obligation.
  - China uses invoice-matching technology to verify merchants seeking VAT refunds.
- Peer-to-peer platforms and digital marketplaces can improve tax reporting and collection:
  - Estonia: Uber can report income earned by drivers directly to the tax administration.
  - Airbnb withholds hotel taxes on behalf of property owners in 10 advanced and emerging market economies.

### Digital payments, mobile technology, and biometrics
- Digital payments lower administrative costs and expand potential tax bases by improving identification and monitoring of taxpayers.
- Mobile technology adoption:
  - sub-Saharan Africa had 420 million unique mobile subscribers in 2016, expected to increase to 535 million.
  - Kenya’s M-Pesa system (launched in 2007) can be used to pay taxes.
- Biometrics and financial inclusion in India:
  - Aadhaar registered about 1.15 billion residents.
  - A financial access program launched in August 2014; by March 2017 more than 280 million bank accounts had been opened.
  - Direct Benefit Transfer program (launched in 2013) transfers subsidies directly into bank accounts linked to Aadhaar.
  - In April 2017, Indians were required to include their Aadhaar number in tax filings; more recently required to link individual bank accounts to Aadhaar.
  - The 2018 budget proposed an Aadhaar program for businesses.
  - Ministry of Communications and Information Technology estimated savings of about $7 billion over the previous two and a half years from such programs.
  - Costs of the Aadhaar system through its first billion-plus registrations were about $1.16 a person, or $1.3 billion in total.
- McKinsey & Company estimate: digitalizing government payment processes could deliver savings of at least 1 percent of GDP in developing economies (estimate excludes second-round effects).

### Secure storage and blockchain applications
- Blockchain/distributed ledger technology can increase trust by creating permanent, tamper-evident transaction records.
- UK Department of Work and Pensions is experimenting with blockchain to record benefit payments and reduce overpayments.
- Conceptual possibilities:
  - Continuous tax accounts across production stages could in principle obviate the need for a VAT, if secure chains of transactions were maintained.

### Examples and measurable impacts
- Estonia and X-Road:
  - At birth, every Estonian is assigned a unique string of 11 digits and given a digital identity card.
  - Government provides more than 600 services online.
  - X-Road enables secure exchange of Internet-based data between information systems and enabled digitalized income-tax declarations.
  - X-Road saved the equivalent of 820 years of work in 2016, according to government estimates.
  - Digital signatures estimated to permit a one-time savings of about 2 percent of GDP, the equivalent of one workweek a person.
- India:
  - Introduction of the new tax on goods and services increased the number of registered taxpayers by 50 percent in less than one year.

### New tax challenges from the digital economy and automation
- Digital business models complicate the existing tax system that focuses on physical presence; major firms can have significant economic presence with little or no brick-and-mortar presence.
- Debates and proposals:
  - Some European countries have proposed taxing a element of turnover rather than profits where user-generated value is significant.
  - Suggestions include taxing robot capital or taxing profits generated through automation; others propose fairer distribution of capital ownership.
  - Universal basic income is noted as gaining support despite being costlier than means-tested systems.
- Data as a potential tax base: discussion of whether data should be treated like a natural resource (the metaphor “data is the new oil”) and taxed accordingly.

### Limits, pitfalls, and risks
- Digital technology is not a substitute for sound procedures and operations; poor implementation can create new problems:
  - Prepopulated tax returns with erroneous information may encourage cheating if taxpayers lack incentive to correct mistakes.
  - Political, institutional, and human capacity constraints can hinder innovation and uptake.
  - Corrupt actors may bypass digital systems; cryptocurrencies might be used to evade taxes.
  - Digital exclusion limits leapfrogging potential where large segments lack access.
  - The past contains many unsuccessful and costly IT projects.
- Cybersecurity, privacy, and fraud risks:
  - Data thefts from US agencies such as the Internal Revenue Service and State Department highlight vulnerabilities.
  - Some European countries have faced multiple fraudulent VAT refund claims that are individually small but significant in aggregate.
  - The digitalization of public finance may involve an arms race between attackers and defenders.

### Policy guidance and managing change
- Priorities for countries to reap digital dividends:
  - Focus on solutions addressing pressing national priorities (for example, biometrics and social registries to help vulnerable populations; electronic payment systems and mobile technology to reduce leakages).
  - Strengthen fiscal, political, and governance institutions to avoid pitfalls: digital exclusion, cyberattacks, fraud, privacy infringement.
- The urgency of action is underscored by the speed of private-sector innovation; both opportunities and risks are likely to be profound.

*Sanjeev Gupta, Michael Keen, Alpa Shah, and Geneviève Verdier — Finance & Development, March 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/march/gupta.pdf_