Studies indicate that tax authorities often face significant challenges in ensuring businesses comply fully with VAT and tax obligations. This is the reason why tax receipt lotteries clearly have to come to our attention. Issues such as tax non-reporting or underreporting frequently arise due to factors like the absence of formal financial systems, insufficient incentives for compliance, reliance on cash accounting, and limited or inefficient enforcement resources. As a result, many businesses underreport their income or fail to file taxes entirely, deepening the nation’s tax revenue gap.
5 Key Takeaways
- Rwanda’s EBM Framework and Lottery: Rwanda introduced the Electronic Bill Monitoring (EBM) framework and EBM Lottery to address tax evasion and promote compliance, incentivizing businesses and consumers to engage with tax reporting systems through rewards like cars and motorbikes.
- Challenges in Rwanda’s Initial EBM Implementation: Technical difficulties, business resistance, complex lottery participation methods, and poor communication hampered Rwanda’s early adoption of EFD systems, limiting consumer engagement and compliance.
- Revamping Rwanda’s EBM Lottery in 2024: Rwanda addressed shortcomings by simplifying the tax receipt registration process, introducing a fixed VAT rebate, and incentivizing whistleblowing, aiming to enhance consumer participation and expand tax enforcement reach.
- Serbia’s Success with QR Code-Based Receipts: Serbia modernized its tax receipt lottery in 2022 by adopting a QR code-based system, simplifying participation, increasing consumer engagement, and reducing costs, while ensuring accurate tax reporting and compliance through dual-layer transaction tracking.
- Key Lessons from Global Tax Receipt Lotteries: Effective tax receipt lotteries require user-friendly processes, meaningful incentives, strong communication, and transparent frameworks, as demonstrated by successes in Serbia and challenges in Rwanda, highlighting the importance of aligning systems with consumer behavior and local contexts.
Tax Receipt Lotteries: The Case of Rwanda
To address these challenges, Rwanda introduced the Electronic Bill Monitoring (EBM) framework in 2013 as a key component of its Public Financial Management (PFM) reform strategy, which began in 2008. This initiative aimed to combat tax evasion, increase revenue, enhance the efficiency of Rwanda Revenue Authority (RRA) audits, improve taxpayer profiling, and minimize the tax gap and fraud risk through robust tax and customs compliance programs.
In 2011/2012, the RRA launched tenders to source consultancy services, devices, and data analysis software, seeking a solution that would maximize control through counter-fraud measures and capture transaction-level data at the point of sale. Rwanda aimed to become the third East African Community country, after Kenya and Tanzania, to implement fiscalization and Electronic Fiscal Devices (EFDs).
Focus on the Adoption of EFD Systems
By August 2011, the RRA issued expressions of interest for a certified invoicing system (CIS) and a sales data controller (SDC), which together formed the EFD system. Different manufacturers supplied these components to ensure Rwanda’s independence from a single vendor. The procurement of 500 EFD units was completed by mid-2012, marking the start of the pilot phase. However, due to procurement, supplier, technical, and legislative difficulties, only 464 taxpayers received EFDs by April 2013, and the project continued to face challenges, primarily related to taxpayer compliance.
In August 2013, a Ministerial Order empowered the RRA to enforce measures to boost the adoption of EFD systems. This led to a significant increase in implementation, with over 3,000 new companies adopting the technology by early 2014. Just six months after its start, the RRA reported impressive results, though it found that the number of compliant taxpayers remained low while it set the final and official deadline for taxpayers to install and use the EFDs for 1st April 2014. Despite the power granted to the RRA, it deemed its enforcement efforts insufficient, and by 2015, growing resistance from businesses had resulted in only 8,000 of the 15,000 VAT-registered taxpayers adopting EFD systems.
2015 RRA launch of the EBM Lottery program
Business avoidance of EFD system implementation was further fueled by exemptions granted by the RRA to businesses meeting specific criteria, such as annual sales below FRW 1.2 million, the majority of their sales being VAT-exempt, or VAT-qualifying sales occurring only during limited periods of the year, or businesses with existing VAT recording systems deemed sufficient, thereby causing “unfair technical difficulty” for the use of EFDs.
To address these issues, the RRA launched the EBM Lottery program in September 2015, making Rwanda the first country in Sub-Saharan Africa to implement a tax receipt lottery, drawing inspiration from the success of similar initiatives globally. This strategy incentivized customers to request receipts, prompting businesses to adopt EFD systems and register transactions, thereby ensuring the recording and reporting of their sales revenue and tax obligations to the RRA. The Rwandan EBM Lottery featured valuable prizes such as cars, motorbikes, and phones, with draws held every four months and consumers participating by submitting receipt information via mobile text messages.
Tax Receipt Lotteries: Decline in Participation
Although initial participation showed promise, with 110,000 players and 38,000 valid EFD receipts filed within two months of the program’s launch, participation gradually declined over time. The process involved cumbersome mobile text messages with three separate codes, which often led to errors. Additionally, creating a “lottery account” was challenging due to the technological limitations of the time. Low adoption of EFD systems outside Kigali, the capital of Rwanda, compounded the problems and many businesses, whether truthfully or fraudulently, reported revenues below the VAT-eligibility threshold to avoid mandatory EFD use, thereby excluding themselves from the lottery system as well.
A 2017 study by the International Growth Centre (IGC) found that poor communication from the RRA further diminished engagement; 40% of consumers were unaware of the lottery, and 56% mistakenly believed it only applied to large retailers, even though 41% of participating businesses were smaller shops. As a result, only 15% of consumers requested receipts, often encountering higher prices or resistance from businesses when they did. Ultimately, only 8% of purchases resulted in receipts, and the complex submission process for lottery participation further reduced the proportion of successfully submitted receipts to just 4%. The IGC study highlighted the importance of ease of participation for consumer engagement and found that incentives must outweigh the perceived inconveniences and potential price penalties imposed on consumers by businesses for requesting a tax receipt.
Response to Participation Challenges
Responding to these challenges, the Rwandan Government announced new measures in February 2024 to enhance EBM Lottery, along with voluntary taxpayer disclosure incentives. These measures included enhanced public communication strategies, voluntary disclosure of businesses’ overdue taxes, a simplified receipt registration process via a dedicated website in addition to mobile text messages, and a fixed 10% VAT rebate for all registered receipts, with quarterly credits.
As a result, it is no longer a matter of luck whether consumers win a prize after registering tax receipts; instead, the system applies the refunded amount as reimbursement in every case, encouraging consumers to contribute to tax compliance enforcement. Additionally, consumers reporting noncompliance now receive an additional 50% of any tax penalties imposed on offending businesses. These changes aim to address the shortcomings of earlier efforts and drive greater adoption of EFD systems and tax compliance, especially in underserved regions.
Tax Receipt Lotteries: Uncovering the Core Issue
At the time of writing this article, the effects of the changes to Rwanda’s EBM Lottery program remain uncertain. However, one question persists: What truly influences businesses’ tax compliance? Is it the type of prizes offered as incentives to encourage consumers to participate in tax receipt lotteries as an extension of tax compliance enforcement? Or perhaps it’s the penalties imposed on businesses when consumers report noncompliance?
Could it be the complexity of participating in the tax receipt lottery, where consumers must not only text receipt details to register them but also record their phone numbers on the tax receipts when they are issued? Or is it the revenue threshold below which EFD system use is not required, making it difficult to track business revenue, combined with the exemptions granted by the RRA? Perhaps it’s the communication issues or the lack of clear information for consumers on how to participate in the lottery. Or is it the technology itself, as many countries have already replaced text messages with simpler QR code- and web-based services? Or maybe it’s the combination of all these factors?
Reward and Civic Duty
When discussing consumer incentives and tax compliance enforcement, it’s essential to address the core problems before focusing on delivering solutions. While today’s tax compliance challenges aren’t entirely new, the solutions available to address these issues have evolved. Therefore, instead of patching outdated frameworks and systems that often impose limitations hindering progress, starting afresh may present a more appealing option.
Effective tax enforcement incentives are not solely reliant on technology. As highlighted by the research on the Portuguese tax receipt lottery, titled “Please Give Me an Invoice,” it emphasizes that “it is necessary to know how to best motivate citizens to aid the authorities, and the motivation to behave cooperatively may be influenced by different factors.” The paper reveals that Portuguese consumers are willing to cooperate with tax authorities in compliance enforcement, not only for rewards but also because they view it as a civic duty, along with initiatives that address their concerns, nurture public spirit, and promote good governance and justice.
Importance of Applying Effective Incentives
Kosovo provides a prime example of the importance of applying effective incentives, as the redesigned tax receipt lottery changed participation rules and shifted how consumers engaged in requesting receipts. As a result of the rule changes, which reduced the odds of winning the lottery, individuals, either out of empathy for business owners or simply in exchange for a free coffee, started declining receipts, disregarding the legal significance of tax compliance. Consequently, these adjustments led to reduced contributions to Kosovo’s budget, undermining the initial objective of the tax receipt lottery incentive program.
On the other hand, while tax penalties and sanctions can impact tax compliance by deterring non-compliance, their effectiveness is debated. Some studies suggest that fear of punishment motivates taxpayers to meet obligations, with penalties acting as a necessary deterrent. However, Nurul and Rahayu (2022) argues that penalties alone may not be enough to ensure sustained compliance. Their study emphasizes the crucial role of taxpayer awareness, the quality of tax services, and modern technologies in fostering compliance. The study concludes that a more effective approach combines communication, education, improved services, and technology, suggesting that these factors, when synergized, have a more significant impact on compliance than penalties alone.
Building trust and understanding between the systems and the people they serve is equally crucial. This requires aligning these systems with local contexts, human nature, cultural norms, and societal values to ensure success. Technology adoption must go hand in hand with a clear understanding of these local dynamics to create a complete framework that is efficient, fair, and transparent.
The Case of Serbia
A good example of recognizing the core of problems and adapting to circumstances, especially due to the huge contrast between old and new methods, is Serbia’s renewal of its consumer tax enforcement incentive program.
Serbia launched its receipt lottery in 2017 to enhance tax compliance over the existing fiscalization (EFD) system. Initially, consumers had to collect physical receipts with a value of at least €1 and mail them via post to the Tax Administration to enter the lottery. However, the cumbersome process, concerns about counterfeit receipts, the incurred costs and administration, and the moderate results in compliance enforcement highlighted the need for change. As a result, in 2022, the entire fiscalization system, including the receipt lottery, was put under scrutiny and upgraded with the deployment of the TaxCore VAT Monitoring System (VMS).
This new system not only modernized tax administration and strengthened control through counter-fraud measures and advanced technology capable of capturing transaction-level data at the point of sale, but it also introduced a modern and user-friendly interface that simplified and enhanced consumer participation in the tax receipt lottery.
Tax Receipt Lotteries: Seamless Participation
A seamless solution replaced the cumbersome process of collecting and mailing printed receipts: consumers now instantly join the lottery by scanning a system-generated QR code printed on the receipt with their everyday mobile phones. Beyond the Serbian Tax Authority’s effective communication campaign to educate users about the new system, this convenience boosted participation rates and ultimately strengthened tax compliance enforcement by encouraging consumers to request tax receipts during purchases, all at a significantly lower government cost and with reduced administrative requirements.
A unique feature of the system is its dual-layer approach to reporting transactions through the receipt lottery incentive program. While the system records and transfers all transaction data to the Tax Administration via Sales Data Controllers (SDCs), it also embeds simplified transaction information into the QR code that consumers scan to participate in the lottery. Beyond merely enabling lottery participation, scanning the QR code also sends the simplified transaction data directly to the Tax Administration, reinforcing tax reporting and compliance through a secondary channel. Additionally, consumers can instantly verify receipt and transaction details, report any discrepancies, and the Tax Administration can identify further issues through intuitive system reports should the primary reports from the SDC and the secondary reports from QR code scanning fail to match.
The Serbian tax receipt lottery offers attractive incentives, such as real estate, cars, and travel packages. Combined with its simple participation process and heightened consumer awareness, it effectively motivates consumers to request receipts, ensuring accurate transaction data recording and enhancing business tax compliance at all levels.
The TaxCore VMS and the well-designed receipt lottery program, within a well-structured framework, have successfully boosted tax compliance and revenue, strengthening Serbia’s tax enforcement and paving the way for the country’s prosperous future.
Tax Receipt Lotteries: User-friendly and Transparent Frameworks Needed
Rwanda’s experience with its Electronic Bill Monitoring (EBM) Lottery highlights that high-value consumer incentives, such as cars and motorbikes, alone are insufficient to drive tax compliance enforcement. Despite the appealing prizes, factors such as a complex registration process, poor communication, and resistance from businesses, particularly in the absence of consistent legal enforcement, could limit consumer participation. Additionally, the technology itself, including cumbersome text-message-based systems, may present significant barriers.
The solution to these challenges lies in developing a framework, even if necessary, from scratch, that is both user-friendly and transparent, while offering meaningful incentives and educating consumers about their role in the process. Simplified processes, such as using QR codes for effortless participation in the tax receipt lottery and clear communication strategies, can significantly boost engagement, as shown in the Serbian example. A transparent and straightforward system fosters trust in Tax Authorities, encouraging businesses and consumers to support compliance initiatives.
Rwanda’s recent adjustments to the EBM Lottery aim to address its shortcomings, but a focus on ease of use, transparency, and raising consumer awareness remains key to achieving lasting success.
