Improving local tax compliance through point-of-sales devices in Indonesia

Stepping up subnational government revenue mobilization is critical to ensure the success of Indonesia’s fiscal decentralization. Strong subnational government revenue mobilization, driven by local taxes (Figure 1), allows for less reliance on central government transfers and encourages fiscal independence. Point-of-sales (POS) systems are a promising path to get there.

Figure 1. Own-Source Revenue (OSR) Composition of Districts in Indonesia, 2021

Both central and subnational governments have initiated efforts to improve tax compliance, including by introducing POS usage. Once deployed, POS devices facilitate direct sharing of sales information between targeted tax subjects and the local tax authority. Such digitization is expected to reduce the chance of taxpayers’ underreporting and improves the accuracy of users' taxable transaction reports.

Our working paper fills this knowledge gap by providing evidence of the impact of POS distribution on local tax revenues. By using administrative data on firm-level monthly hotel and restaurant tax receipts, the list of POS recipients, and the time of POS distribution, we performed a difference-in-difference estimation in two districts. Since providing the devices incurs costs, determining the causal impact of this POS distribution program is particularly crucial before scaling it up. Hotel and restaurant taxes typically rank in the top five local tax revenue streams (see Figures 2 and 3).

The districts implemented three different types of POS systems: Regular POS (RPOS), Transaction Monitoring Devices, and Web Service.

• RPOS refers to the entire sales recording system, including the cash register and interface that enables users to record every transaction electronically. Restaurants with basic transaction recording systems, such as manual bookkeeping, or an offline cash register, were typically the ones to receive an RPOS. While RPOS devices in district 2 do not have a direct connection to third-party data or service, district 1, besides having the same type of RPOS, also has a modified RPOS (called RPOS-Grab) which is directly connected to an online food delivery service, Grabfood.
• Transaction Monitoring Devices (also known as Tapping Boxes or Interceptor Boxes) are devices that are hooked into taxpayers’ existing electronic transaction systems and pass transaction records to local tax authorities.
• Lastly, Web Service (also known as Client Reader) is a software that reads users’ online sales system to extract transaction records and pass them on to tax authorities. It is designed for larger users that typically have their own online sales system like chain hotels or restaurants.

Our work shows that certain point-of-sales systems substantially increased local tax revenues, ranging from 55 to 180 percent.

We show the impact of POS devices in district 1 (Figure 4) and district 2 restaurant tax (Figure 5). The visualizations support our findings that only Transaction Monitoring Devices and RPOS-Grab are effective in district 1 and 2, respectively.

Figure 4. District 1

Figure 5. District 2

While we also saw a gap between the treatment and the control group following intervention on hotel taxpayers, our robustness checks do not confirm direct causality between POS distributions and the increase in hotel tax revenues. In short, the increase in hotel tax revenues is not necessarily entirely caused by POS usage.

We offer several recommendations for the national scalability of POS adoption:

First, district governments should not simply rely on point-of-sales devices to boost compliance. POS is merely an additional tool for enforcement and not a substitute for it.

• Second, considering the limited resources of local governments, a risk-based enforcement system is therefore required for effective and efficient enforcement of local taxes.
• Third, a well-defined legal structure for point-of-sales distribution within district administrations needs to be established.
• Fourth, local governments must thoroughly analyze the costs and benefits of deploying point-of-sales before deciding whether to fund such an intervention.
• Finally, governments must be aware of the technology that makes tampering with point-of-sales systems possible.