VAT Gaps in Developing Countries: Measurement, Administration and Politics

In the post-COVID-19 environment, policy makers in many countries will be searching for revenues. Due to the political difficulty of creating new taxes or raising existing ones significantly, the focus may well shift to improving the yield of existing or reformed taxes. We explore VAT revenue efficiency and its relationship with the VAT gap, discussing the different versions of the gap and outlining the main approaches to measurement. We then turn to the interpretation and limitations of VAT gap estimates, presenting some cross-country estimates calculated under different approaches. Finally, we consider some implications of VAT (and other tax) gap estimates for developing countries in the context of consumption tax reform for revenue mobilization, including a brief look at some political economy challenges to the use of VAT gap estimates.