Tax Compliance, VAT Revenues and Business Development in Tanzania

By Vilde Blomhoff Pedersen

30 October 2018 13:47

Tax Compliance, VAT Revenues and Business Development in Tanzania

The Research Council of Norway has funded a 4 year long project on VAT compliance in Tanzania. The project is led by Odd-Helge Fjeldstad (CMI) and is hosted by CMI. Among the team members are Vincent Somville from FAIR and Ingrid Hoem Sjursen affiliated with FAIR.

The project “Tax Compliance, VAT Revenues and Business Development in Tanzania” (TaCoTa) focuses on the Value Added Tax (VAT). VAT has emerged as one of the main modes of raising government revenue globally, but has significantly under-performed in Africa. Like governments in many other African countries, the Government of Tanzania has strived to improve the effectiveness of the VAT system by reducing tax evasion. A key initiative was the introduction of Electronic Fiscal Devices (EFDs) issuing VAT-receipts in 2010. Despite the EFDs, VAT collection has not improved as expected. A possible explanation for the limited success is that businesses do not always use the machine to issue receipts. The current project suggests a potential policy to increase the issuance of EFD receipts, by rewarding customers to ask for them. In collaboration with the Tanzania Revenue Authority (TRA), a large field experiment will be conducted where businesses in randomly selected areas participate in a VAT receipt lottery for customers. VAT receipts will be used as tickets in the lottery, and the probability of winning will be proportional to the amount spent. The project will study the effect of the lottery on VAT collection and tax revenues. In addition, it will examine the effect of taxation on business development by investigating how the VAT affects the prices on goods paid by the customers, business outcomes and formalization, since avoiding taxes is one of the reasons why firms are informal and outside the fiscal system. The project aims to inform policy makers on the scope for using a receipt lottery to improve VAT compliance, and to generate knowledge of high relevance for the Norwegian “tax for development” agenda.

more projects in developmental economics by FAIR