Incentivising small firms to boost VAT revenue: Evidence from Zambia
This policy brief investigates the effectiveness of programs that aim to increase Value Added Tax (VAT) revenues by incentivising small retail firms to request formal VAT invoices. Findings indicate that a lottery scheme can effectively incentivise firms to collect VAT receipts.
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Dillon et al. Policy Brief October 2023.pdf
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- Value Added Tax (VAT) is one of the most effective tools for increasing revenue in fiscally constrained environments.
- VAT is subject to revenue leakage when VAT-registered firms sell to non-VAT buyers, resulting in revenue loss.
- This study examines two policy tools to encourage small firms to request formal VAT invoices from their VAT-registered suppliers, generating a record of the transaction and increasing the probability that tax is remitted.
- The first incentive is a probabilistic financial reward (a lottery). The second incentive is a tax morale message intended to prime non-financial reasons to comply with tax laws.
- We evaluate the effectiveness of these tools using two randomised controlled trials (RCTs) in Lusaka, Zambia.
- We find that small non-VAT firms react strongly to even modest financial incentives, suggesting this is an important precursor to possible scale-up.
- Tax morale messaging seems to have only a small, short-term effect on VAT invoice requests by study firms.