The Potential of Central Bank Digital Currency for Transforming Public Finance : A Focus on VAT Systems

This paper explores the potential benefits of Central Bank Digital Currency (CBDC) for public finance, focusing specifically on its use in the Value Added Tax (VAT) system. With low adoption rates in jurisdictions that have launched retail CBDC, questions have arisen about the actual solutions that CBDC provides. The paper examines the potential of a retail CBDC to streamline and automate the transaction, record-keeping, filing, tax payment, refund processes, and auditing reducing compliance and administration costs for businesses, government, and financial institutions. While e-invoicing and e-payment may also achieve similar outcomes, the success of such alternatives would depend heavily on the financial institutions. The paper concludes that CBDC can address challenges faced by the VAT system while preserving simplicity, fairness, and effectiveness. Additionally, the paper also suggests that CBDC could usher in transformative changes in public finance as a whole, but adoption and design should not be solely determined by their potential impact on the tax system