Firm responses to tax policy innovations: Experimental evidence from Zambia

There is intense interest in finding ways to deepen fiscal capacity in Zambia. Increasing VAT compliance is central to that agenda. The Zambia Revenue Authority (ZRA) began issuing Electronic Fiscal Devices (EFDs) to VAT-registered firms in 2018. EFDs are cash registers that are linked to the mobile network. They transmit a record of the sale to ZRA in real time, and they print out a formal VAT invoice that is supposed to be given to the buyer, making tax avoidance more difficult. In the initial years after deploying EFDs, aggregate VAT collections did not trend upwards to any substantial degree, and implementation challenges materialised. This project emerged from the desire within ZRA to understand (a) were EFDs having any impact on VAT remittances? and (b) what complementary policies, or alternatives to EFDs, would be most effective at increasing VAT remittances?

This project involves two high impact studies. The first is a randomised controlled trial with small non-VAT firms, rather than households, to test whether they can be incentivised to request invoices from their VAT suppliers. The second activity builds on previous analysis of ZRA administrative data. Given that the roll-out of EFDs had no average effect on VAT remittances, ZRA wants to know if that null effect masks important heterogeneity. If firms in the network can be identified for whom the arrival of an EFD had positive effects on VAT remittances, accounting for network spill-overs, then that will help them target upcoming initiatives to reissue and update the EFD system.