Background/Aim:
Tax compliance remains a significant challenge for governments worldwide, as traditional VAT and income tax systems are often inefficient, prone to fraud, and administratively complex. Blockchain technology presents a potential solution by offering transparency, immutability, and decentralization, which can enhance tax compliance processes. This study explores the application of public and private blockchain configurations in tax administration, evaluating their effectiveness in fraud prevention, operational efficiency, and regulatory adaptability. The aim is to determine the comparative advantages and limitations of these blockchain models in VAT and income tax compliance and propose a framework that optimizes their integration into existing tax systems.
Methods:
A comparative analysis of public and private blockchain configurations was conducted, focusing on key performance metrics such as fraud reduction, cost efficiency, transparency, data privacy, and compliance accuracy. Public blockchains, such as Ethereum with IPFS, were assessed for their role in real-time invoice verification and VAT compliance, while private blockchains, such as Hyperledger Fabric, were evaluated for their secure handling of income tax data. The study also examines regulatory challenges, interoperability issues, and technological constraints affecting blockchain adoption in tax administration.
Results:
The findings indicate that public blockchains significantly enhance transparency and fraud detection, reducing invoice fraud by 90% and lowering administrative costs by 85%. However, their limited data privacy raises concerns for transactions involving sensitive financial information. In contrast, private blockchains prioritize data security and controlled access, ensuring 95% data privacy and 88% compliance accuracy in income tax reporting. Despite these advantages, private blockchains incur higher operational costs and require robust governance mechanisms for effective implementation. The study also identifies regulatory uncertainty, interoperability with existing tax infrastructures, scalability constraints, and technological complexity as key barriers to blockchain adoption in tax compliance.
Conclusion
To maximize the benefits of blockchain in tax administration, a hybrid blockchain framework is recommended, combining public blockchain transparency for VAT compliance with private blockchain security for income tax management. Policymakers must establish clear regulatory frameworks, invest in scalable digital infrastructure, and promote system interoperability to facilitate adoption. A phased implementation strategy, incorporating pilot programs, public-private partnerships, and targeted policy incentives, is crucial for a smooth transition to decentralized tax compliance. Future research should explore cross-border blockchain tax models, AI-driven fraud detection, and the economic implications of blockchain-based tax compliance to further enhance the effectiveness of this technology in global tax governance.
Key words: Blockchain, VAT compliance, Income tax compliance, Smart contracts, Public blockchain, Private blockchain, Tax fraud prevention, Tax automation, Digital tax governance
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