Abstract
Summary measures of Value Added Tax (VAT) compliance rates are valuable for identifying problem areas in VAT implementation. They are also essential for meaningful crosscountry and crosstime comparisons of VAT compliance. We present a comprehensive and general framework for calculating VAT compliance rates at both the economy wide and detailed sectoral levels. Unlike existing measures of VAT compliance, our framework isolates a compliance measure from the effects on VAT receipts of detailed features of VAT systems as actually implemented by tax authorities. These features include multiple VAT rates, exemptions, registration rates, refund limitations, informal activity, taxation of domestic nonresidents and undeclared imports. We implement our comprehensive VAT compliance measure for Vietnam, a country with a complex VAT system. Our estimate of Vietnam's VAT compliance rate is about 13 percentage points higher than that calculated by the most popular measure of compliance, Collection Efficiency (CE). Our method facilitates decomposition of the difference between CE and our VAT compliance measure into individual contributions by the statutory and structural features of Vietnam's VAT regime.
Highlights
The widespread use of the value-added tax (VAT) is due in part to its perceived efficiency and effectiveness in raising tax revenue compared with other indirect taxes
Most researchers acknowledge that this crude measure ignores the detailed features of VAT systems as implemented by tax authorities – namely, differential VAT rates, VAT exemptions, differential registration rates, VAT refund on investment good purchases, and informal imports
2 EXISTING MEASURES OF VAT COMPLIANCE Two measures of VAT revenue collection efficacy most commonly used by analysts undertaking cross-country and cross-time studies are VAT productivity (VP) and VAT collection efficiency (CE)
Summary
The value-added tax (VAT) has become the most common general consumption tax in the world. The widespread use of the VAT is due in part to its perceived efficiency and effectiveness in raising tax revenue compared with other indirect taxes. In the period 1998-2000, the average share of VAT revenue in total tax collected in countries with a VAT was over 20%.3 like other taxes, the VAT is vulnerable to tax evasion, tax fraud and poor enforcement. Given the VAT’s revenue raising importance, there have been many time series and cross-country studies investigating the effectiveness of VAT compliance and enforcement. Most studies calculate potential VAT revenue crudely, multiplying a single VAT rate by the value of final consumption. In calculating CE indices that do not take into account the details of real-world VAT systems, VAT researchers risk seeing both their CE measures misinterpreted, and policy makers misinformed. VAT compliance and enforcement index that takes account of the aforementioned features of real-world VAT systems. We calculate a measure of Vietnam’s compliance rate and explore the specific influences on this measure of Vietnam’s VAT system and economic structure.
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