The value-added tax in developing countries

Resource Information

The work The value-added tax in developing countries represents a distinct intellectual or artistic creation found in International Bureau of Fiscal Documentation. This resource is a combination of several types including: Work, Language Material, Continuing Resources.

Label

The value-added tax in developing countries

Creator

• Casanegra, M
• Guerard, M
• Lent, G

Subject

• developing countries
• VAT
• sales tax
• VAT exemption
• VAT system

Language

eng

Summary

Choosing a sales tax technique depends on a variety of considerations to be weighed by each country in the light of its own economic and social conditions. Alternative techniques that have proved successful include (1) a single-stage manufacturers'/importers' tax; (2) a hybrid retail/wholesale tax; (3) a tandem system, including separate taxes on sales by manufacturers or wholesalers and on retail sales; and (4) a value-added tax (VAT). Most developing countries have general sales taxes only at the manufacturing stage, with compensatory tax on imports. Two techniques can eliminate double taxation. (1) The suspensive technique exempts purchases by licensed manufacturers and importers; however, it offers greater opportunity for evasion and may require greater administrative effort. (2) The value-added technique provides for either a deduction from taxable sales of taxable purchases, or a credit against tax chargeable on sales for tax paid on purchases, and is less subject to tax evasion. The introduction of the VAT in Western Europe has captured the interest of other countries. Brazil, Ecuador, Ivory Coast, the Malagasy Republic, Morocco, Senegal, and Uruguay are among the countries that have adopted sales taxes based on the value-added principle. All depart, in some respects, from the European model of a comprehensive, uniform, and neutral tax on the consumption of goods and services, thereby illustrating the adaptation of tax structure to different economic and social conditions. Significantly, however, all employ the tax-credit device in applying the value-added principle. Developing countries are likely to restrict the scope of the VAT by excluding the most troublesome sectors (farmers, retailers, etc.) because of difficult enforcement problems. Most of them exempt farmers as a simple way of granting tax relief to the lowest-income group. In some countries, selective excises on luxury goods increase the tax burden on the higher-income groups, without necessarily resorting to a multiple rate structure for the VAT itself. Developing countries may be less concerned than industrial countries with removing investment expenditures from the tax base; when they do wish to remove investments from the base, they may choose to exempt producer goods from the tax, rather than use the tax-credit method, since the former is generally easier to apply. Techniques for dealing with small businesses under a VAT include use of forfait and the tax-credit pass-through facility. Revenue data for the countries covered show that the VAT produces between 10 per cent and 30 per cent of government tax revenue and is among the most productive forms of sales tax. As with sales tax revenue generally, VAT revenues in developing countries can be expected to increase at a faster rate than the rate of growth of the economy. Efficiently administering a VAT in developing countries depends on many factors, including characteristics of the VAT to be introduced, the country's economic structure and social environment, the revenue expected from the VAT, and experience with the sales tax that it replaces. A VAT with multiple rates and many exemptions presents greater difficulties of administration and compliance than a single-rate tax with few exemptions

Citation source

In: Staff papers - IMF : Vol. 20, No. 2 (July 1973), p. 318-378

Geographic coverage

• International
• Europe

Language note

English