Agenda for VAT Modernization

Chapter 18 sums up the arguments for the widely shared belief that VAT’s role in the tax system primarily is to raise revenue, predictably and efficiently. Accordingly, African VATs would benefit from a thorough review of the standard and non-standard exemptions, exclusions and zero rates, which depress tax collections, distort consumer and producer choices, discriminate against exports, favour imports, greatly increase administrative complexity, and promote tax avoidance. The case for VAT base-broadening is greatly strengthened by the findings of incidence studies that show that the net result of fiscal systems can be equalizing if the revenue from broad-based VATs is used to finance in-kind transfers, such as healthcare and education. Importantly, the emphasis on VAT policy should not detract from the centrality of VAT administration in shaping desirable outcomes. But better VAT design should lay the groundwork for better VAT administration. Last but not least, modernizing VAT systems requires a change in mindsets.