Adopt Malaysia's E-invoicing  model to reduce tax evasions

The prosperity of a nation is significantly tied to its institutions. According to the 2024 Nobel laureates in economics, Daron Acemoglu, Simon Johnson, and James A. Robinson, institutions play a pivotal role in determining a country's economic trajectory. Their work has significantly advanced our understanding of how inclusive institutions-those that provide incentives and opportunities for a wide cross-section of the population-foster growth and prosperity, while extractive institutions stifle progress by concentrating wealth and power in the hands of a few.

For nations like Bangladesh, where the economy is rapidly growing yet facing challenges in domestic revenue mobilization, improving institutions is critical. As the Nobel Prize-winning economists suggest, strong political institutions provide the foundation for inclusive economic institutions, which in turn lead to sustainable growth and national prosperity. In this context, domestic government revenue collection, particularly through effective Value Added Tax (VAT) collection, becomes paramount.

Acemoglu and his co-authors-Johnsonand Robinsonemphasized that the wealth of nations is largely shaped by the political and economic institutions in place. Inclusive institutions that enforce property rights, encourage innovation, and facilitate market entry are essential for long-term economic growth. On the contrary, extractive institutions-designed to benefit a small elite at the expense of the majority-lead to persistent poverty and inequality. For Bangladesh to achieve its goal of becoming a middle-income nation, institutional reform, particularly in tax administration, is essential.

This is where Malaysia's model of e-Invoicing offers valuable lessons. As Malaysia transitions to a Continuous Transaction Control (CTC) model of e-Invoicing, the country is setting an example of how institutional improvements can enhance tax compliance, reduce evasion, and strengthen public finances.

Apart from Malaysia, several Asian countries are either in the process of implementing or have already implemented e-Invoicing systems to modernize their tax structures and reduce evasion. For instance, India, South Korea, and Taiwan have already introduced e-Invoicing frameworks with varying models like real-time reporting and clearance mechanisms.Additionally, countries such as Vietnam and Indonesia are also moving towards adopting e-Invoicing to enhance tax compliance and transparency in financial transactions across various sectors. These efforts across Asia reflect a growing trend towards digitizing tax systems for better governance and revenue collection.

Malaysia's e-Invoicing system, set to be fully implemented by 2025, is designed to streamline VAT collection and enhance transparency. The system will initially target businesses with an annual turnover exceeding MYR 100 million and will eventually cover all taxpayers. By mandating real-time reporting and validation of invoices through the Inland Revenue Board (IRBM), the system creates an effective barrier against tax evasion.

The introduction of this system is part of Malaysia's broader digital transformation aimed at increasing government revenue, boosting compliance, and improving the overall business environment. Key features of the system include the use of Application Programming Interfaces (APIs) for seamless integration with businesses' existing Enterprise Resource Planning (ERP) systems. The government is also offering a phased approach to ensure a smooth transition, with testing environments and a six-month grace period before penalties are imposed for non-compliance.

This structured rollout ensures that businesses have ample time to adapt to the new system. The government's phased approach, starting with larger businesses and gradually including smaller entities, is designed to minimize disruptions while maximizing compliance. This model aligns with Acemoglu, Johnson, and Robinson's insights on how strong institutions can lead to inclusive economic outcomes by encouraging widespread participation and compliance.

The implementation of e-Invoicing in Malaysia is expected to bring several key benefits to the economy:

Increased Revenue Collection: By reducing opportunities for VAT evasion and underreporting, Malaysia aims to significantly increase its tax revenue. This additional revenue will help fund public goods and services, fostering a more inclusive economy.

Improved Transparency: Real-time reporting and validation of invoices ensure that all transactions are recorded accurately. This reduces the likelihood of fraudulent practices and strengthens the overall integrity of the tax system.

Ease of Compliance: By integrating with existing business software, the system minimizes the administrative burden on businesses. This encourages voluntary compliance, as businesses find it easier to submit accurate tax returns.

Long-Term Economic Stability: The increased revenue from improved VAT collection will reduce Malaysia's reliance on foreign debt, thereby enhancing fiscal stability. This aligns with the long-term benefits of reducing debt reliance, as emphasized in Bangladesh's context.

Bangladesh's VAT collection target for FY2024-25 is set at Taka 177,600 crore, which is Taka 25,900 crore up from Taka 151,700 crore of the previous fiscal year, with a growth of 17.07 per cent. Achieving this target will require significant improvements in tax compliance and collection efficiency. This is where a centralized e-Invoicing system, similar to Malaysia's model, can play a transformative role.

Bangladesh has already recognized the need for institutional reform in its tax administration. The proposed National Invoice Automation System, which aims to integrate real-time VAT collection for manufacturers, service vendors, and traders, is a step in the right direction. This system, if implemented effectively, could lead to a substantial increase in domestic VAT collection.

Implementation of Malaysia's E-Invoicing experience demonstratesfor Bangladesh, how strategic planning and phased implementation can lead to successful modernization of tax systems, which are,

Phased Implementation: Bangladesh should adopt a similar phased approach, starting with large taxpayers and gradually expanding to smaller businesses. This will allow time to address any technical challenges and ensure a smooth transition.
API Integration: To ensure widespread compliance, the system should be integrated with businesses' existing accounting software. This will reduce the administrative burden and encourage voluntary compliance.

Incentivizing Compliance: Offering incentives for businesses that consistently comply with VAT regulations can foster a culture of cooperation between the government and the private sector.
Real-Time Reporting: By implementing real-time reporting and validation of invoices, Bangladesh can reduce VAT evasion and improve transparency in the tax system.

The 2024 Nobel laureates have demonstrated that the prosperity of nations is built on the foundation of inclusive institutions. For Bangladesh, the journey to becoming a prosperous nation requires strengthening its tax institutions, particularly through the implementation of a centralized e-Invoicing system. By learning from Malaysia's experience, Bangladesh can increase its VAT collection, reduce reliance on foreign debt, and foster long-term economic stability.

Moreover, building a centralized automated system would also encourage local ICT companies to collaborate with international tax experts, contributing to the domestic software industry's growth. As Bangladesh strengthens its institutional framework, its ability to invest in social and economic development will increase, paving the way for a more prosperous, self-reliant nation. Institutional reform is not just a pathway to increased tax revenue but the foundation for sustainable economic growth and prosperity for future generations.

In the long run, a system that provides transparency and compliance will drive the confidence of both local and foreign investors, further contributing to the nation's wealth and development. By focusing on strengthening institutions and modernizing tax systems, Bangladesh can create a future where prosperity is accessible to all its citizens.

Enamul Hafiz Latifee, Trade and Policy Development Economist, Lifetime Member, Bangladesh Economic Association, Dr. Md. Abdur Rouf, Member (VAT Implementation & IT), National Board of Revenue (NBR)