# **1 Introduction**

Government enforcement is a key factor determining tax compliance. The better the enforcement quality, the more it can minimize evasion (Slemrod, 2007). Transaction digitization through electronic payment technology is one such way to improve tax compliance. This is because it generates paper trails by both third parties and the government as a reliable basis for audits. Combined with well-functioning monitoring and audit systems, such paper trails can deter under-reporting behavior (Allingham and Sandmo 1972; Kleven et al. 2011, Pomeranz 2015, and Naritomi 2019). Consequently, international organizations have advised promoting the use of an electronic payment system to increase tax compliance (OECD 2018, World Bank, 2020).

There is a growing body of literature on third-party reporting and its impact on government revenue in advanced economies, as discussed by Gordon and Li (2009), and Kleven et al. (2016). However, there is little evidence on whether enacting transaction digitization programs among businesses can boost compliance and therefore increase tax revenue in developing countries, particularly in subnational settings. This study exploits unique administrative data on restaurant tax receipts in the Indonesian districts of West Manggarai and Gorontalo.<sup>1</sup> We aim to explore the variation in restaurant tax payments before and after the distribution of the Point of Sale (POS) machines among hotels and restaurants located in the districts.

Initiated by the Indonesian government and gradually implemented at sub-national levels following the recommendation of The Commission of Corruption Eradication ( _Komisi Pemberantasan Korupsi_ ), the program was meant to optimize local governments’ ownsource revenues (Komisi Pemberantasan Korupsi, 2020). Once installed, POS devices enable the direct dispatch of sales records from targeted tax subjects to the local tax authority. This mechanism enhances the accuracy of users’ taxable transaction reports and minimizes the possibility of taxpayers’ underreporting. Down the line, the produced sales records can be accessed by the tax authority for compliance monitoring.

We begin by discussing a conceptual framework to consider how surveillance enhancement may affect firm behavior. The POS distribution program improves the accuracy and timeliness of taxable sales records and has a deterrent effect on businesses’ noncompliance. However, for POS adoption to positively affect tax payments, the program’s beneficiaries must install and use POS units. When left idle and/or tampered with the purpose of altering tax liability, the government’s control function running through the system becomes muted. However, studying recipients’ behavior towards adopting the assigned POS is beyond the scope of our study. This study investigates the general link between a program’s application and the obtained tax payments.

To empirically examine the influence of POS distribution on tax payment, we utilized administrative data on firm-level monthly restaurant tax receipts, the list of POS recipients, and the time of POS distribution to perform a difference-in-difference (DiD) estimation in the Indonesian districts of West Manggarai and Gorontalo.

> 1Throughout this paper, ’Gorontalo’ refers to The City of Gorontalo _(Kota Gorontalo)_ , not to be mistaken with The Regency of Gorontalo _(Kabupaten Gorontalo)_ or The Gorontalo Province.

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