Is minimum the maximum? The case of unbiased evasion estimates and tax recycling under informality
Theoretically, value added tax (VAT) regimes are economically neutral because the firms only collect and remit tax on value added by them. The informal sector gets an extra burden because it cannot claim credit for tax paid in the upstream supply chain: this is extra VAT for the tax authorities. Practically, however, developing countries face significant VAT evasion driven by the informal economy.
-
Is_Minimum_the_Maximum_PAK-22073.pdf
PDF document • 578.8 KB
The imposition of minimum VAT is a tax policy which breaks the economic neutrality principle but promises extra revenues. This study examines the minimum value addition (MVA) regime in Pakistan to:
- determine the extent of pure VAT evasion by isolating the inherent ‘Income
Tax effect’; - estimate how much of the extra tax burden in VAT gets back to the taxman;
- estimate the segregation between formal and informal sectors;
- use the two estimates to provide first evidence on recycling of VAT; and
- compare VAT with turnover tax.
.