The VAT in Practice: Equity, Enforcement and Complexity

Abstract

The value added tax (VAT) is supposed to be a tax on consumption that achieves greater economic efficiency than alternative indirect taxes. It is also meant to facilitate enforcement through the ‘self-enforcing mechanism’ – based on opposed incentives for buyers and sellers, and because of the paper trail it creates. Being a rather sophisticated tax, however, the VAT is complex to administer and costly to comply with, especially in lower-income countries. This paper takes a closer look at how the VAT system functions in practice in Rwanda. Using a mixed-methods approach, which combines qualitative information from focus group discussions with the analysis of administrative and survey data, we document and explain a number of surprising inconsistencies in the filing behaviour of VAT-remitting firms, which lead to suboptimal usage of electronic billing machines, as well as failure to claim legitimate VAT credits. The consequence of these inconsistencies is twofold. It makes it difficult for the Rwanda Revenue Authority to exploit its VAT data to the fullest, and leads to firms, particularly smaller ones, bearing a higher VAT burden than larger ones. There are several explanations for these inconsistencies. They appear to lie in a combination of taxpayer confusion, fear of audit, and constraints in administrative capacity.

Using Administrative Data to Assess the Impact of the Pandemic in Low-Income Countries: An Application with VAT Data in Rwanda

“…These firms are only liable to pay income taxes, often under simplified regimes that minimise their compliance costs. The VAT threshold in Rwanda is relatively low(Mascagni, Dom, and Santoro 2021), which implies the exclusion of micro firms, while small ones are still part of our dataset.14 Our VAT data only refers to VAT-registered firms in Rwanda. It therefore excludes VAT paid on imports by non-registered firms, organisations and individuals.…”

“…For more details on the functioning of Rwanda's VAT system, seeMascagni et al (2021) 24 Based on VAT declarations for monthly taxpayers.25 The corresponding monthly figures, calculated only based on monthly declarations, are reported in Appendix TableA10.26 As reported in data available on the website of the Rwandan Ministry of Finance and Economic Planning, total taxes on goods and services were RWF 720.1 billion in 2019.…”