The customer is king: Evidence on VAT compliance in Tanzania

Odd-Helge Fjeldstad,Ingrid Hoem Sjursen,Ephraim Mdee,Cecilia Kagoma,Vincent Somville

doi:10.1016/j.worlddev.2019.104841

Abstract

Abstract Value Added Tax (VAT) has emerged as one of the main modes of raising tax revenue worldwide, but has significantly underperformed as a revenue source in African countries. To improve compliance, Tanzania has introduced Electronic Fiscal Devices (EFDs), which automatically transmit information about business transactions to the tax administration. However, VAT collection has not improved as expected. In this paper, we examine EFD compliance and identify factors that influence it. An innovation in this study is the direct observation of EFD usage: our enumerators waited for customers departing from business premises, and then checked their receipts, interviewed them and interviewed the businesses. This design enabled us to observe each business’s actual compliance in issuing EFD receipts, thus mitigating the problem of dishonest reporting of compliance, which is common in self-reported survey data. We find that EFD compliance is associated not only with the business’s perception of other businesses’ compliance and its satisfaction with public services, but also, and more strongly, with the customer’s perception of detection and penalty risks.

Highlights

Value added tax (VAT) has emerged as one of the main modes of raising revenue worldwide, but has significantly underperformed as a revenue collection tool in Africa (Cnossen 2015; Moore, Prichard and Fjeldstad 2018)
This paper provides a direct measure of VAT compliance and its links with key factors identified in the literature on tax compliance: the perceived risk of detection and punishment, tax morale and fairness of the tax, beliefs about others’ compliance, and satisfaction with public services (Cowell 1990; Alm, McClelland and Schulze 1992; Andreoni, Erard and Feinstein 1998; McKerchar and Evans 2009; Fjeldstad, SchulzHerzenberg and Sjursen 2012)
We focus on businesses that have an Electronic Fiscal Devices (EFDs), and try to understand the factors that influence the actual usage of the EFDs, which captures an important aspect of VAT compliance

Summary

Introduction

Value added tax (VAT) has emerged as one of the main modes of raising revenue worldwide, but has significantly underperformed as a revenue collection tool in Africa (Cnossen 2015; Moore, Prichard and Fjeldstad 2018). Instead, existing research relies on indirect measures of VAT compliance, typically changes in VAT revenues (Alm, McClelland and Schulze 1992; Alm and McClellan 2012; Lamberton, De Neve and Norton 2014). This paper provides a direct measure of VAT compliance and its links with key factors identified in the literature on tax compliance: the perceived risk of detection and punishment, tax morale and fairness of the tax, beliefs about others’ compliance, and satisfaction with public services (Cowell 1990; Alm, McClelland and Schulze 1992; Andreoni, Erard and Feinstein 1998; McKerchar and Evans 2009; Fjeldstad, SchulzHerzenberg and Sjursen 2012)

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Conclusion