Vital to enriching TAXDEV’s work with partner governments is a broader programme of research on taxation in low- and middle-income countries. This research draws on the findings from the analysis in partner countries, as well as theoretical and empirical evidence from elsewhere, to further develop the evidence base, (providing valuable insights for a wider range of priority countries with varying political systems, institutional frameworks and socio-economic characteristics).
At the beginning of the programme we published a document which outlines our focus until March 2018:
Briefing Note: VAT and simplified tax schemes: preliminary results
This briefing note presents preliminary results from a study on value added tax (VAT) and tax compliance in the Indian state of West Bengal. It focuses particularly on the impact of a tax reform that lowered the compliance costs small firms faced when paying their taxes. This is a pressing issue for many governments in low- and middle-income countries, which view widening the tax net as a key priority, but must seek to do so without placing an excessive burden on small firms that are often ill-equipped to comply with complex administrative processes.
The simplest form of value added tax (VAT) – and the form often advocated by international organisations – is one with a broad base and a single (‘uniform’) rate. In practise, most countries exempt and/or apply lower VAT rates on certain categories of goods and services. In this note authors summarise the pros and cons of such ‘VAT rate differentiation’ that are highlighted in the economics and taxation literatures, paying particular attention to the applicability and relevance of each factor for low- and middle-income countries.
Considering first the case for applying different rates – including zero rates – to different goods and services, this briefing note highlights theoretical arguments based on economic efficiency and a more practical redistributive argument.
Considering the case for exempting particular goods and services from the VAT system entirely, the authors discuss a number of ‘special cases’ (such as small firms, public services and financial services) before focusing on the administrative and efficiency issues posed by exemptions more generally.