Policy recommendations



  • The key strengths of VAT systems are their self-enforcing properties, but it is important to also consider their weaknesses (e.g., remaining opportunities for credit fraud and refund management), which can be particularly challenging to address in contexts where tax authorities have limited resources.
  • ICTs provide new enforcement opportunities to improve the effectiveness of VAT systems. However, the design of new policies should carefully consider ‘take-up’ costs in the local context, for consumers (e.g., the costs of participating in consumer monitoring), firms(e.g., the costs of adopting EBMs), and tax administrations (e.g., the costs of effectively processing information from EBMs).
  • Moreover, the legal system may need to be adapted to adequately support the new levels of information flowing into tax authorities(e.g., by facilitating taxpayers’ amendment of their records in case of data inconsistencies and protecting sensitive business information captured by electronic receipts).
  • Policymakers should consider repercussions along supply chains when designing VAT exemptions or enforcement strategies. Exempting firms or sectors that are important trade partners for many taxpayers (or allowing them to be de facto exempt) may have sizable implications for revenue mobilisation and production efficiency.
  • Relatedly, it may be best to address different policy goals (e.g., industrial policy) by using different policy instruments.


  • Researchers should further investigate the detailed activities of tax administration. Reforms of VAT systems can have important implications for the cost of audits and information processing, and there are often organisational decisions (e.g., large taxpayer units, decentralised auditing) that could be informed by better evidence. Okunogbe and Pouliquen (2017), provide an interesting example of how ICT and corruption by officials can interact.
  • Researchers should try to quantify compliance costs of VAT systems and consider how specific reforms may affect these costs. Some exemptions (e.g., VAT thresholds) are motivated by such costs, but little is known about their magnitude. Measuring them is challenging but crucial to assess the total welfare effect of potential reforms. The case of Finland in Harju et al. (2018) isan interesting example of evidence suggesting that compliance costs can affect firm growth, even in a more developed country context.
  • The management of tax credit and export refunds is an important issue given the uncertainty it creates for both firms and the government. However, the aggregate implications of existing policies regarding tax refunds is unclear, as are the potential improvements that alternative policies could bring about.
  • Evidence on the incidence of a VAT in contexts of limited enforcement and high informality would be very important to shed light on the distributional consequences of VATs in developing countries. Singhal (2013) discusses some of these issues in the context of Bihar.
  • The earlier studies in this new wave of VAT research uses administrative data from developing countries that are in the middle- to high-income range. More research is needed to understand how VAT works in lower income countries where some of the concerns highlighted in this brief could be particularly relevant. Recent IGC projects in sub-Saharan Africa, as well as the TaxDev programme of the Institute for Fiscal Studies in Ghana and Ethiopia, present a great step in this direction.