How Efficient Electronic Invoicing in Suppressing the Shadow Economy

HOW EFFICIENT ELECTRONIC INVOICING WILL BE IN SUPPRESSING THE SHADOW ECONOMY IN THE SAUDI MARKET
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How Efficient Electronic Invoicing will be in Suppressing the Shadow Economy in the Saudi Market
Introduction
Shadow economy goes by many names; gray economy, underground economy, black economy, black economy, etc. Alsubaie (2020, 4) defines shadow economy as ‘all unregistered productive market transactions that would, if recorded, typically increase the official gross domestic product (GDP).’ However, this definition does not entail criminal activities which are economically transacted, i.e., sale and distribution of drugs, human trafficking, etc. thus, more comprehensive definition of shadow economy according to Medina & Schneider (2018, 2), shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. Shadow economy is hard to quantify as it entails legal and illegal economic activities. The main reasons for its existence are to evade tax, social security contributions, regulatory requirements, corruption, and weak law enforcement coupled with political instability.
The average size of the shadow economy of 158 countries over 1991 to 2015 is 31.9 percent (Medina & Schneider, 2017, 2). Most countries are still grappling with shadow economies, including Saudi Arabia. The countries that have exceptionally low percentages of their economies under shadow economy are Austria and Switzerland, with 8.9% and 7.2%, respectively (Medina & Schneider, 2017, 2). Saudi Arabia has also been grappling with a shadow economy. According to Medina, Saudi Arabia’s shadow economy has averaged between 13.34 and 19.5 from 1998 to 2015 (Medina & Schneider, 201, 2).
Governments and policymakers grapple with the effects of the shadow economy and how to bring it to book. Reducing shadow economy means more taxes, easier strategic plans, less crime, etc. Since it is impossible to root out shadow economy, policymakers try to understand its size to plan accordingly. Understanding the size of the shadow economy is important because it controls a significant size of the GDP. It uses the country’s legal tender and employs a significant portion of the population while contributing almost nothing to the government in taxes.
Kingdom of Saudi Arabia Economy
The Kingdom of Saudi Arabia’s economy is the largest in middle and north Africa. According to the World Bank (2018), it had a $782 billion GDP in 2018. If the underground economy estimates relative to GDP have been hovering over 10% of the GDP, over $78 billion has been in shadow economy in the country. These figures signify huge losses of money lost in income tax revenue and fund illegal activities in the country. If left unchecked, these monies could fund terrorists while the government loses on income tax revenue.
The Saudi Arabian economy is largely driven by exports. The Kingdom of Saudi Arabia is the largest petroleum oil exporter in the world. The economy is still largely depended on the export though the government has been divesting its investments in other industries to create a more resilient e...