Donor aid represents roughly 40 percent of Rwanda’s national budget. Expanding the tax base has been a crucial strategy in curbing its dependence on foreign aid. Value-added tax (VAT) is the largest tax-based contribution to government revenues in Rwanda and has been identified as a key priority for raising overall revenue

Ghirmai, Eva

Logan, Sarah

Murray, Sally

LSE Research Online

20/06/2017 The incidence and impact of Electronic Billing Machines for VAT in Rwanda - IGChttp://www.theigc.org/blog/the-incidence-and-impact-of-electronic-billing-machines-for-vat-in-rwanda/ 1/4Authors Eva GhirmaiResearcherRwanda Team Sarah LoganHub EconomistCountry Programme, IGCLondon Hub, Researcher Sally MurraySenior CountryEconomistResearcher, RwandaTeamPublished on: 15 Apr 2016Countries: RwandaResearch themes: Public Sector andTax “The incidence and impact ofElectronic Billing Machines forVAT in RwandaDonor aid represents roughly 40 percent ofRwanda’s national budget. Expanding the taxbase has been a crucial strategy in curbing itsdependence on foreign aid.  Value-added tax(VAT) is the largest tax-based contribution togovernment revenues in Rwanda and hasbeen identiﬁed as a key priority for raisingoverall revenue.In August 2013, the Rwandan government passed legislationrequiring VAT-registered firms to provide customers with acertified Electronic Billing Machine (EBM) receipt for eachsale.  EBMs record and transmit all sales transaction data to theRwanda Revenue Authority (RRA) in real time, enablingimproved monitoring of firms’ VAT obligations and, hence,compliance.In an effort to assess the uptake and impact on tax revenues ofthe EBM initiative, IGC researchers Nada Eissa and AndrewZeitlin, together with Saahil Karpe and Sally Murray,conducted a study of VAT-paying stores in Rwanda.Although all VAT-registered firms in Rwanda were eventuallyrequired to use EBMs (except exempted firms), the programmewas rolled out in phases, allowing for a rigorous impactevaluation to be conducted.Data from VAT declarations, EBM adoption, and a small-scale‘mystery shopper’ study were used to explore impacts oncompliance and resulting government revenues. Adoption aloneis not enough – longer-term efforts to improve compliance muststrengthen incentives for actual usage of EBMs to have anymeaningful impact on revenues.Requesting an EBM receipt increased the chances ofreceiving one by 42 percentage points. This suggestedthat policies that motivate consumers to request VATreceipts could be a very effective way to raisecompliance and revenues. ”The study also provided insights into how VAT costs are sharedbetween consumers and firms, and how the RRA can realise the20/06/2017 The incidence and impact of Electronic Billing Machines for VAT in Rwanda - IGChttp://www.theigc.org/blog/the-incidence-and-impact-of-electronic-billing-machines-for-vat-in-rwanda/ 2/4between consumers and firms, and how the RRA can realise thefull potential of EBMs for increasing tax compliance and raisingrevenues.EBM adoptionThe adoption of EBMs was rapid, reaching 77.8% of activeVAT-paying firms by 2014Q3. However, adoption variedconsiderably by economic sector. Adoption was highest amonghotel and restaurant sectors (89.2% and 87.8%, respectively),followed by transportation, wholesalers, and retail. Adoptionwas lowest among firms offering business services (at only38.8%), where ‘services’ were defined as legal, financial,management, and consulting.Larger firms were more likely to be early adopters of EBMs, butby 2014Q2, smaller firms had caught up entirely with nosystematic correlation remaining between firm size and EBMadoption. What might explain the lag in early adoption bysmaller firms is the requirement that firms cover the cost of theEBMs themselves. An EBM costs approximately 211,050 RWF(£192), which may pose a significant cost and liquiditychallenge for small firms. An alternative explanation is that theRRA focused its earlier compliance and sensitisation activitieson larger tax-payers due to greater expected uptake and revenueimpacts.The impact of EBM adoption on VAT revenue generationEBM adoption increased firms’ VAT payments by 5.4% onaverage, although impacts varied substantially by sector andfirm size. The median firm in 2012Q1 had a quarterly VATpayment of 211,631 RWF (£195), and the impact of EBMadoption for such a firm was 11,428 RWF (£11) per quarter, or45,712 RWF (£42) per year.The largest impact on VAT generation was seen in thecomputing sector, followed by construction, hotels, and retail.Little impact was noted in telecommunications, restaurants, andmanufacturing. This is most likely because pre-EBM VATcompliance in these sectors was relatively high to begin with.Kigali constructionImage credit: Steve AndersenAlthough the largest firms in the sample were less responsive tothe adoption of EBMs, the revenue impacts of their adoptionwere larger. This is consistent with the view that larger firms20/06/2017 The incidence and impact of Electronic Billing Machines for VAT in Rwanda - IGChttp://www.theigc.org/blog/the-incidence-and-impact-of-electronic-billing-machines-for-vat-in-rwanda/ 3/4were larger. This is consistent with the view that larger firmshad better VAT compliance pre-intervention and that targetingcan improve compliance and revenue collection among largerfirms.Both the smallest and largest deciles of firms showed anapproximately 14% increase in VAT declarations as a result ofEBM adoption. The impact on revenues for firms in thebottom-decile was just 1,135 RWF (£1) per quarter, but theimpact for top-decile firms was a revenue increase of 1,983,568RWF (£1,825). Given the high initial costs of the machines forfirms, it would take years for some small firms’ increased VATpayments to break even on the initial outlay for the machines.This brings into question the cost effectiveness of requiringEBM adoption for small firms.Mystery shoppersThe researchers and the RRA hypothesised that the overallimpacts of EBM adoption were fairly low (5.4% on average)due to inconsistent usage. Although issuance of an EBM receiptto customers is now mandatory, it is not always certain thatcustomers will receive receipts if they are not explicitlyrequested, particularly for small purchases.In order to estimate the extent of firms’ non-utilisation of theEBMs they have installed, the researchers undertook a small-scale ‘mystery shopper’ survey, in which enumerators visited129 EBM-active retail stores in Kigali and made smallpurchases of goods such as tea, coffee, soap, and staples, valuedbetween 500 RWF and 2,000 RWF (£0.46 and £1.80). Eachshop was visited 3 or 4 times; in half of the visits enumeratorsspecifically asked for an EBM receipt.Kigali marketImage credit: Katie TaylorThe mystery shopper survey helped confirm the RRA’shypothesis that despite being mandatory, receipts were notalways being provided for small purchases; in fact, unless theywere explicitly requested by customers, receipts were providedin only 21% of visits. However, it also revealed somethingimportant for compliance policy, namely that merely requestingan EBM receipt increased the chances of receiving one by 42percentage points. This suggested that policies that motivateconsumers to request VAT receipts could be a very effectiveway to raise compliance and revenues.20/06/2017 The incidence and impact of Electronic Billing Machines for VAT in Rwanda - IGChttp://www.theigc.org/blog/the-incidence-and-impact-of-electronic-billing-machines-for-vat-in-rwanda/ 4/4way to raise compliance and revenues.The survey also sought to understand how the costs of VATcompliance affected firms’ profits and consumer prices. It foundthat the mystery shoppers paid more for goods when theydemanded EBM receipts, but that VAT costs were only partiallypassed on to consumers. Price increases represented only ~50%of the total VAT on goods purchased. The researchershypothesised that firms are wary of charging consumers higherprices due to competition from other (non-compliant or non-VAT-registered) firms, and hence shared the burden of VATwith their customers.Policy implicationsFuture EBM adoption efforts should target sectors with lowercompliance rates, and where absolute revenue impacts fromadoption would be high; the construction sector in particularmeets these criteria. Additionally, to increase compliance acrossthe board, the RRA could work to raise firms’ incentives toutilise installed EBMs by for example, strengthening purchasers’incentives to request EBM receipts (‘consumer audits’) andincreasing firms’ perceived risk of RRA audits.Partly as a result of this study, 3 such interventions are nowbeing trialled with support from the IGC. One focuses onconsumer demand for receipts, and turns EBM receipts intolottery tickets from which consumers can win cash prizes. Thiswas trialled earlier in Rwanda, but a cumbersome system ofprize acknowledgement and delivery curbed its effectiveness.Now the lottery is undergoing an evidence-based redesign (withinputs from the IGC) to optimise its effectiveness.The second intervention targets firms’ perceived risk of beingcaught and penalised for not issuing EBM receipts: plain-clothesmystery shoppers will visit firms on behalf of the RRA and theRRA will issue fines if EBM receipts are not provided toconsumers. The IGC will study whether audit strategy increaseEBM compliance, and the overall cost-effectiveness of andoptimal design for the intervention.A third innovation is to improve the RRA’s ICT systems, sothat firms’ monthly and quarterly VAT declarations areautomatically checked against the data transmitted to the RRAby EBMs. This final change was suggested by an additional IGCstudy that found discrepancies between firms’ sales as recordedby their EBMs and the sales they formally declared in theirregular VAT declarations.Findings of this study and its follow ups confirm the need totarget enforcement activities in a way that does not negativelyaffect firm growth, consumer welfare, or allow non-compliersto out-compete compliant firms. 

The incidence and impact of electronic billing machines for VAT in Rwanda

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