The Rise of VAT in Africa – Impact and Challenges - empcom.gov.in

Like a vast majority of countries in the world,
African countries have not been able to resist
the attraction of VAT in the past 20 years. In this
article, the authors focus on the administrative
aspects of the VAT in Africa, including
implementation issues, the conditions for the
successful introduction and operation of VAT
and the challenges of the reform of the tax
administration.
1. Introduction
Like a vast majority of countries in the world, African
countries have not been able to resist the attraction of
VAT in the past 20 years. Adopted by only 1 countries
in 1990, VAT has now been introduced in 1 1 countries,
including 8 in Africa (Tables 1 and 2). 1 Since the release
of The Modern VAT in 2001, the literature on VAT and its
impact on the tax systems of developing countries has
expanded, 2 including articles that raise a number of
questions regarding the suitability of VAT for developing
countries, but do not suggest credible alternatives.
In Africa, as in other regions, the introduction of VAT
has been accompanied by major changes in the tax system,
including improvements in the taxation of imports
and domestic supplies of goods and services, and modernization
of the organization and procedures of the tax
administration. Indeed, while further efforts are still
needed to improve tax compliance in several African
countries, VAT has been a platform to launch major tax
administration reforms in the entire region.
Given the lack of adequate administrative capacity in
many African countries, tax policy and tax administration
aspects are more closely linked than usual. In these
countries, sound tax policy options are critical to the
success of the tax. Since the tax policy options have been
extensively discussed in The Modern VAT and the subse-
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The Rise of VAT in Africa – Impact and
Challenges
Table 1. Spread of VAT in the past 40 years
Number of countries with a VAT
Year Europe 1 America Africa 2 Middle
East and
Central
Asia
Asia
and
Pacific
Total
1970 7 3 1 0 0 11
1980 14 12 2 1 1 30
1990 20 18 5 2 6 51
2008 44 26 38 12 21 141
1. Including Turkey, Russia and Central Europe.
2. Including North Africa.
Table 2. Spread of VAT in Africa
Number of
countries
introducing
VAT Countries
Jean-Paul Bodin
and Vincent Koukpaizan*
Before 1970 1 Ivory Coast
1970-1979 1 Senegal
1980-1989 3 Morocco, Niger, Tunisia
1990-1999 22 Algeria, Benin, Burkina Faso,
Cameroon, Congo, Egypt, Ethiopia,
Gabon, Ghana, Guinea, Kenya,
Madagascar, Mali, Mauritius,
Mauritania, Mozambique, Nigeria,
South Africa, Tanzania, Togo,
Uganda, Zambia
Since 2000 11 Botswana, Cape Verde, Central
Africa, Chad, Equatorial Guinea,
Lesotho, Malawi, Namibia, Rwanda,
Sudan, Zimbabwe
Plans for
2009-2012
10 Angola, Burundi, Comoros,
Democratic Republic of Congo,
Djibouti, Gambia, Guinea Bissau,
Liberia, Sierra Leone, Swaziland
quent literature on VAT, this article focuses on the
administrative aspects of the tax in Africa, including,
VAT implementation issues (section 2.), the conditions
for the successful introduction and operation of VAT
(section .) and the challenges of the reform of the tax
administration (section .).
2. VAT Implementation Issues in Africa
2.1. Main features of VAT
Typically, the features of the VAT systems of the African
countries vary and depend on traditions and the date of
introduction of the tax (see Table ). The oldest VATs
* Jean-Paul Bodin was a division chief in charge of Revenue Administration
in the IMF Fiscal Affairs Department until July 2007. Vincent
Koukpaizan is currently a tax administration adviser for West AFRITAC.
Both are members of the IMF group of tax experts.
1. Ebrill, Keen, Bodin and Summers, The Modern VAT (IMF, 2001, being
revised) and International Tax Dialogue (ITD), The VAT: Experiences and
Issues, (ITD, 200 ).
2. Bird and Gendron, The VAT in Developing and Transitional Countries
(Cambridge University Press, 2007); and Krever et al, VAT in Africa (Pretoria
University Law Press, 2008).
. Emran and Stiglitz, “On Selective Indirect Tax Reforms in Developing
Countries”, Journal of Public Economics (200 ); and Damme, Mirashi and Orel,
The IMF’s Regressive Secret: Tax Policy Advice and Its Distributional Impact
(London School of Economics, 2008).
. For the purposes of this article, VAT is a broad-based tax on final consumption
of goods and services, with a deduction mechanism for the tax
charged on inputs and investments using the invoice method exclusively.
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Table 3. VAT in Africa – main characteristics (2008)
Country Year of adoption Rate(s) Registration threshold
(in USD)
Anglophone countries
Botswana 2002 10 40,000 0.45
Egypt 1992 10, 5, 20, 30 27,000 0.34
Ethiopia 2003 15 54,000 0.32
Ghana 1998 12.5 11,000 0.45
Kenya 1990 16 75,000 0.32
Lesotho 2003 14, 5, 15 80,000 0.37
Malawi 2001 17.5 15,000 0.36
Mauritius 1998 15 96,000 0.45
Namibia 2000 15 28,000 0.33
Nigeria 1994 5 0 0.33
Rwanda 2001 18 38,000 0.27
South Africa 1991 14 42,000 0.46
Sudan 2000 10 50,000 0.13
Tanzania 1998 20 32,000 0.26
Uganda 1996 18 20,000 0.23
Zambia 1995 17.5 50,000 0.38
Zimbabwe 2004 15 2,500 0.64
Hispano/lusophone countries
Cape Verde 2004 15 2,300 0.53
Equatorial Guinea 2005 15 0 0.25
Mozambique 1999 17 4,000 0.27
Francophone countries
Algeria 1992 17, 7 43,000 0.19
Benin 1991 18 80,000 2 0.35
Burkina Faso 1993 18 60,000 2 0.26
Cameroon 1999 19.3 94,000 0.21
Central Africa 2001 18 100,000 2 0.12
Chad 2000 18 56,000 2 0.06
Congo 1997 18.9, 5 36,000 2 0.18
Gabon 1995 18, 10 150,000 2 0.12
Guinea 1996 18 30,000 2 0.17
Ivory Coast 1960 18 100,000 2 0.25
Madagascar 1994 18 100,000 0.27
Mali 1991 15, 10 60,000 0.45
Mauritania 1995 14 24,000 2 0.38
Morocco 1986 20, 7, 10, 14 200,000 2 0.33
Niger 1986 19 60,000 2 0.09
Senegal 1979 18 100,000 2 0.44
Togo 1995 18 60,000 2 0.09
Tunisia 1988 18, 6, 10, 29 78,000 2 0.34
Efficiency ratio 1
1. The ratio of VAT revenues to GDP divided by the standard rate of VAT. A different criterion to assess the efficiency of VAT is the “C-Efficiency ratio”, which is defined
≈≈as the ratio of the share of VAT revenues in consumption, rather than GDP: see The Modern VAT (note 1), Chapter IV.
2. Threshold applicable to supplies of goods. A different threshold applies to supplies of services.
© IBFD INTERNATIONAL VAT MONITOR MAY/JUNE 2009
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were adopted in the francophone countries, including
Ivory Coast, Morocco, Senegal and Tunisia. They have a
complex rate structure (three to four rates), different registration
thresholds depending on activity (for example,
supplies of goods and provision of services), a large
number of exemptions (including exemption for supplies
to exporters 5 , the achats en franchise), and a withholding
mechanism for supplies to the government and
state-owned enterprises 6 (see below). Since the early
1990s, new approaches have been developed to improve
the design of VAT in Africa, including the adoption of a
single positive rate for domestic supplies, fewer exemptions,
and higher registration thresholds. Such an
approach was initiated in Benin in 1991 and, thereafter,
adopted by the majority of African countries where VAT
has been adopted.
As in many developing countries where technical assistance
has been provided, the features of the VAT have
often been influenced by foreign experts. In several
cases, these experts’ advice simply replicated practices
that had been developed in their own country. This
explains, for example, the complex rate and threshold
structures, and widespread exemptions in the “first generation”
VATs that were introduced in francophone
countries until the end of the 1980s, as well as the very
low registration thresholds in hispano and lusophone
countries (for example Cape Verde and Mozambique),
and the uncertainty regarding the most suitable organization
for VAT administration in most anglophone
countries (for example in Malawi, where VAT was initially
administered by customs and, subsequently, by a
VAT directorate that was eventually merged with the
income tax administration).
In recent years, several countries, for example Algeria,
Ivory Coast and Senegal, where old VAT systems had
been introduced, have successfully modernized these
systems. However, experience of other countries, including
Egypt, Morocco and Tunisia, shows that modernizing
a “first generation” VAT may politically be more difficult
than adopting a new VAT in line with best practices.
In the second half of the 1990s, the initiatives of the West
African Economic and Monetary Union (WAEMU) and
Central African Economic and Monetary Community
(CAEMC) to harmonize the indirect tax systems of their
member countries on the basis of recognized best practices
– including drastic simplification of the rate structure,
elimination of several exemptions, an increase in
the registration threshold, and a simplified tax regime for
small businesses below this threshold – have contributed
to the modernization of VAT in West Africa. In the coming
years, similar improvements can be expected in other
African countries, where similar initiatives are being
taken by the East African Community (EAC) or are
being considered by the Economic Community of West
African States (ECOWAS) and the Southern African
Development Community (SADC).
2.2. Main reasons for the spread of VAT in Africa
As in many other countries, the main reason for the
spread of VAT in Africa was the search for an effective,
neutral tax instrument capable of meeting revenue
requirements that could not be satisfied by income tax
and the traditional turnover tax. In most African countries,
VAT has replaced complex turnover taxes that were
inherited from the colonial era. With a narrow base, multiple
rates and complex mechanisms to mitigate their
cascading effect, these taxes were particularly difficult to
administer. 7
VAT has also played an important role in facilitating
trade liberalization and customs tariff reforms in
African countries that form part of regional economic
and customs unions (WAEMU and CAEMC initially),
and those that concluded trade agreements with the
European Union (particularly Morocco and Tunisia).
The measures adopted to support these initiatives have
contributed to more effective VAT and excise tax systems
that were capable of compensating the expected
decrease in the collection of customs duties, and coping
with the challenges of the transition from the old tax
regimes. 8
In most African countries, the introduction and operation
of a modern VAT in line with best practices has also
provided a better environment for modernization of the
entire tax system, beginning with its administration. The
introduction of VAT has provided a platform for major
improvements of the old tax administration systems,
which were inherited from the colonial era and were
often characterized by unnecessarily complex and outdated
organizational and procedural models. 9
2.3. VAT administration – Main challenges
Contrary to the concerns that were expressed in the early
1990s, experience has shown that the introduction of
VAT in Africa has not resulted in major problems, provided
however that the design of the tax was in line with
best practices and that its introduction was carefully prepared.
10 Except in Ghana and Uganda (see below), the
introduction of VAT was generally seen as successful by
. In the francophone countries where the system of “achats en franchise”
has been adopted, exports and supplies to exporters are usually “exempt” with
a possibility to claim a refund of the related input VAT, which is equivalent to
a zero rate.
6. Under this system, suppliers of goods and services charge the full
amount of the VAT to their customers but, instead of paying the amount of the
tax to their suppliers, the customer (“withholding agent”) withholds this
amount and remits it directly to the tax office (note 12).
7. The Modern VAT (note 1) provides an analysis of the turnover taxes that
were replaced by a VAT in Benin, Burkina Faso, Gabon, Guinea, Kenya,
Malawi, Mauritania, Togo, Uganda and Zambia.
8. Chambas, “TVA et transition fiscale en Afrique: les nouveaux enjeux”,
Afrique contemporaine (200 ).
9. Such models included separation of the tax assessment and collection
functions, which were assigned to two separate directorates in the francophone
countries, and separation of the administration of direct and indirect
taxes in the anglophone countries.
10. VAT preparations have been discussed in various documents in the early
1990s, including the guide that was published in 1991, VAT: Administrative and
Policy Issues (IMF Occasional Paper).
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the business community and the tax authorities, who
immediately understood the merits of an effective revenue-raising
instrument, which is neutral for economic
activities. In most African countries, the introduction of
VAT resulted in a quick increase in indirect tax revenues.
11
Modernization of first-generation VATs
Modernization of the old VATs to improve their efficiency
is a major challenge in several countries (especially
North African countries, see Table ). With complex
rate structures, multiple registration thresholds,
pervasive exemptions (including those for supplies made
to exporters), and withholding schemes for supplies
made to the government and public enterprises (the précompte),
12 these VATs were particularly difficult to
administer. These problems have frequently been amplified
by the inability of policymakers to resist pressure
from various lobbies requesting an extension of special
rates or exemptions that were initially reserved for a limited
number of cases.
Broadening the VAT base
Broadening the VAT base is a recurrent challenge in
Africa, where a large share (more than half in most countries)
of the gross VAT receipts is collected on imports.
Important sectors, such as the agricultural sector and
supplies of unprocessed foodstuffs, and aid-funded projects,
are commonly outside the scope of VAT. Several
factors contribute to this situation in less-advanced
countries, including the degree of poverty that prevents
taxation of unprocessed foodstuffs, the structure of economic
activities and the small number of businesses
whose turnover is above an adequate VAT registration
threshold (a few hundred only in the smallest countries).
In this context, broadening the VAT base requires the
development of a more effective approach to deal with
the informal sector, keeping in mind that, contrary to
some experts’ views, a well-designed VAT is capable of
collecting some tax from this sector (see below).
Improvement of VAT efficiency
Although, despite a decrease of customs duties, the
introduction of VAT usually results in higher indirect tax
revenues, it must be recognized that the revenue productivity
of VAT in Africa is generally below its potential.
Improvement of the VAT revenue efficiency is certainly
a major challenge for several African countries where the
tax has been adopted.
The main difficulties in the area of VAT administration
typically materialize several years after the introduction
of the tax. In Africa, as in many other developing countries,
the VAT revenue efficiency commonly deteriorates
in the medium to long term, if the administrative capacity
is insufficient to effectively control claims for refund
of excess input VAT, and to process the exporters’ refund
claims effectively and in good time. This situation leads
to abusive practices and evasion, and pressure to exclude
more activities from the VAT base. In several African
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countries, these difficulties impede the neutrality of VAT
and contribute to the low efficiency ratios mentioned
above (Table ), as compared to the ratios in other
regions. 1
3. Conditions for Successful Operation of VAT
The challenges of operating the VAT system have led
several experts to question the wisdom of introducing
VAT in developing countries. 1 The main criticism on
the adoption of VAT in Africa is based on the following:
– VAT is difficult to administer in these countries in
view of their inadequate administrative capacity. For
example, the refund system is too complex for small
entrepreneurs, who are more easily exposed to
–
harassment by corrupt tax officers than large businesses;
record-keeping requirements are too complex and
tax compliance costs are too high for small businesses;
– due to the high VAT compliance costs, many business
owners choose to operate in the informal sector;
and
– VAT is regressive, especially if a single rate is
adopted, as is recommended for a modern VAT.
These problems have led some experts 1 to take the view
that VAT is not suitable for African countries and that
trade liberalization measures carried out in these countries
since the early 1990s were not appropriate. These
experts claim that, as compared to VAT, customs duties
are easier to administer and better deal with the informal
sector. As discussed in this section and the following,
these conclusions are in fact a criticism on the VATs that
have been introduced in a few African countries without
taking into account the best practices recommended for
successful operation of VAT. The critics also underestimate
the need to modernize the tax and customs administrations
in these countries and the changes required to
establish more effective compliance programmes and
provide better services to taxpayers.
11. The Modern VAT (note 1). As previously mentioned, VAT implementation
has usually been accompanied by measures aimed at simplifying the indirect
tax system, including repealing the former consumption taxes, and
streamlining excise taxes (i.e. reducing the number of excisable items) and the
customs tariff (i.e. typically, reducing the number of tariff bands and the level
of the rates). Given that a large share of VAT revenues is collected on imports,
the revenue impact of the adoption of a VAT must be assessed not only in the
light of VAT efficiency (Table ), but also in the light of the increase or
decrease in the total indirect tax collections.
12. In several francophone countries for example, Cameroon, Ivory Coast
and Senegal, the amount of the VAT to be paid on sales to the central and local
governments is withheld by the Treasury. In other countries, for example,
Kenya in Africa and many countries in Latin America, this scheme also applies
to sales to large businesses that are required to withhold the VAT on their purchases
and remit it to the tax administration. As discussed by Bird and Gendron
(note 2), and Bodin and Koukpaizan in “Taxation of Small Enterprises:
Recent Developments”, International VAT Monitor 2 (2008), p. 121, these
schemes have significant drawbacks that undermine the functioning of the
VAT.
1 . The average efficiency ratio in Africa (including the North African
countries and South Africa) is 0. 0 against 0. 8 in Asia (excluding Australia,
Japan and New Zealand) and 0. in Latin America.
1 . See Damme, Mirashi and Orel (note ) and Emran and Stiglitz (note ).
1 . In particular, Emran and Stiglitz (note ).
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3.1. Fundamental legislative and policy issues
Single or multiple VAT rates
The choice of the rate structure for domestic supplies 16 is
probably one of the most controversial issues since the
introduction of VAT in developing countries. Adoption
of a complex rate structure with three, four, or even five
rates was a predominant feature of the first-generation
VATs that were introduced in France (19 8-68) and in
several other Member States of the European Union (at
the end of the 1960s and the beginning of the 1970s).
However, since the expansion of VAT to other regions,
including Africa from the early 1990s, an increasing
number of countries have adopted a single rate. From the
tax administration’s and business owners’ perspectives, a
single rate is an important factor in simplifying the management
of VAT on the grounds that a single rate:
– facilitates record keeping and invoicing. Contrary to
the situation in countries with a multiple-rate VAT,
there is no need to categorize purchases and supplies
of goods and services in accordance with the applicable
rate;
– helps simplify the VAT declaration form, which can
be limited to a single page and is easier to complete
by the businesses and to process by the tax administration
than a form containing multiple rates;
– facilitates “desk verifications“ (for example, reconciliation
of information derived from the income tax
and VAT returns) and VAT audits (because the auditors
can focus on checking the accuracy of the
reported total supplies and expenses, instead of
checking the distribution of these supplies and
–
expenses in accordance with the applicable rates). A
single rate therefore helps reduce the duration of
audits;
helps avoid the situation of permanent excess input
VAT for businesses whose inputs are subject to a
higher rate than their outputs. Refund claims can
thus be restricted to exporters and investors.
The advantages of a single rate explain why most countries
where VAT was introduced in the past 20 years have
opted for a single rate. Experience shows that the application
of reduced VAT rates has no real impact on the
distributional effect of the tax system. Recent studies
show that revenue losses due to the adoption of reduced
rates benefit mainly the wealthiest persons, whose consumption,
in absolute terms, of food and other items that
are subject to a reduced rate (such as water and electricity)
is higher than that of the poor. 17
Despite the obvious benefits of a single rate, its adoption
is often difficult for policymakers, who are under pressure
to apply concessions to specific types of transactions
or specific sectors. 18 For example, a temporary
increase in the price of basic foodstuffs and raw materials
in 2008 has led some countries in the WAEMU to
question the rules set by the Commission of the
WAEMU in the 1990s regarding the mandatory adoption
of a single VAT rate. The rules have now been
relaxed authorizing these countries to apply a reduced
rate to specific items. 19 Whatever the legitimate concerns
of the supporters of multiple rates may be, it is clear that
their approach can significantly increase the complexity
of VAT and may have negative consequences that need to
be carefully assessed in countries with a weak administrative
capacity. Frequently, these supporters are often
those who also emphasize the unsuitability of VAT for
developing countries, without giving sufficient thought
to the proper balance between the pros and cons of their
position.
Broadening the VAT base
Like multiple VAT rates, exemptions give rise to complexities.
Exemptions increase the risk of cascading and
jeopardize the neutrality of the VAT, which can be particularly
harmful to exports. Exemptions can also give
comparative advantage to imports. Paradoxically, this is
frequently the case for the supply of domestically produced
food items, especially in less-advanced countries.
20 Another major drawback of exemptions is the
risk of proliferation (i.e. extension of the scope of the
exemption to similar items and to inputs used for the
purposes of producing exempt items). For example,
where supplies in the agricultural sector are exempt from
VAT, there will be pressure to extend the exemption to
fertilizers. Moreover, as with multiple rates, purchases
and supplies of exempt goods and services must be
recorded separately and give rise to complex allocation
rules regarding equipment used for making both taxed
and exempt supplies. Those complexities can significantly
complicate the bookkeeping and filing obligations
for businesses. Given their negative impact on the functioning
of the VAT, it is not surprising that the elimination
of exemptions has become an important issue in
most VAT reforms carried out over the past 20 years. 21
In Africa, apart from the traditional exemptions for
social reasons (such as health care and education) or
technical reasons (such as financial and insurance transactions,
which may be subject to special schemes), the
main categories of exemptions are the following:
16. Only exports being subject to the zero rate.
17. Bird and Gendron (note 2) emphasize the need to take a global approach
in assessing the distributional consequences of the tax system, Moreover, the
impact of the VAT threshold must be taken into account. Exempting small
traders from VAT reinforces the progressivity of the tax system, see Keen,
“What Do (and Don’t) We Know about the VAT”, International Tax and Public
Finance (2008). The impact of the registration threshold on progressivity is
particularly important if the threshold is set in line with best practices (see
below).
18. These sectors and transactions vary, depending on the circumstances,
from supplies of unprocessed foodstuffs to services in the tourism sector,
including hotel accommodation and restaurant transactions, small cars, construction
services, etc.
19. To some extent, the difficulties faced by the WAEMU countries may
have been amplified by the relatively high VAT rates in francophone Africa
(often ranging from 18%-20%, as compared to 12%-1 % in many other
African countries, see Table ).
20. Another frequent example in Africa relates to local supplies of school
books that bear VAT on their inputs, while imported books are exempt.
21. The ITD (note 1) and Chambas (note 8) provide an analysis of the drawbacks
of exemptions for unprocessed foodstuff and their negative impact on
the efficiency of VAT in Africa.
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– agricultural sector and supplies of unprocessed food
items;
– support of investments and exports (for example,
exemptions for supplies made to exporters); and
– aid-funded projects.
Despite a few attempts to obtain some VAT revenue from
the agricultural sector, for example, by eliminating
exemptions for specific agricultural inputs, broadening
the VAT base to this sector is likely to be particularly difficult
for a number of years. However, depending on
improvements in checking and processing claims for
refund of excess input VAT 22 (see below), a more aggressive
approach should be adopted to eliminate exemptions
relating to capital goods and supplies made to
exporters and businesses in export processing zones
(EPZs), as well as supplies relating to the exploitation of
natural resources, for example, timber, oil, minerals, etc.
Recent developments regarding the tax treatment of aid
could also lead to a gradual elimination of exemptions in
this area in the coming years.
Exemption of aid has significant drawbacks, especially,
by definition, in the poorest countries where the administrative
capacity is inadequate. Special schemes adopted
to control these exemptions, including the vouchers systems
developed in francophone Africa, are complex and
ineffective. This is especially true for large aid-funded
projects (such as construction of roads, hospitals, etc.),
where VAT exemptions on a range of goods and services
(such as cement, fuel, electricity, cars, equipment, labour
services, etc.), which are imported or purchased on the
local market by various contractors and subcontractors,
cannot be effectively controlled by the tax administration.
This explains why the World Bank and other
donors, such as the Inter-American Development Bank
and the Asian Development Bank, have recently
reviewed their approach and accepted that aid-funded
projects should in principle be subject to VAT. 2
Modernization and simplification of the tax law, including
broadening the VAT base and eliminating exemptions
and reduced rates, are often tough decisions for
policymakers. To facilitate these decisions, several countries
have developed tax expenditure analyses to help
understand the negative consequences of exemptions
and reduced rates. Initially, these systems were introduced
in OECD countries. In recent years, they have also
been used by a few other countries in Africa (for example
Morocco since 2006 and, more recently, Algeria). The
initial results of this approach are encouraging. 2
3.2. VAT registration threshold and treatment of small
businesses
Adoption of a sufficiently high threshold is a critical prerequisite
for successful operation of VAT in countries
with an inadequate administrative capacity. 2 In the
absence of a clear picture of the distribution of businesses
by level of turnover, and a good understanding of
the distribution of the value added among the various
sectors of the economy based on the size of the businesses,
policymakers and experts, who have ignored this
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basic prerequisite, have encountered problems when
VAT was introduced in some countries.
The need for a sufficiently high registration threshold
The cases of Ghana and Uganda, where the introduction
of VAT in 199 and 1996 resulted in serious problems,
including demonstrations and riots, are still remembered
by a number of tax specialists in Africa. The lack of
a sufficiently high registration threshold was identified
as the main reason for these difficulties in both countries.
Despite their weak administrative capacity, the tax
offices attempted to register a large number of small
businesses, who had very little understanding of the
requirements for, and functioning of, the VAT system. In
Uganda, the decision of the authorities to immediately
increase the registration threshold was sufficient to
ensure that VAT was quickly on track. However, in
Ghana, the magnitude of the resistance against VAT led
the government to abolish the VAT law, which was reintroduced
in 1999, with a significantly higher threshold. 26
Until the second half of the 1990s, contrary to the francophone
countries with a tradition of high registration
thresholds that were regularly adapted to inflation, VAT
was introduced in most other African countries with relatively
low thresholds. Except for the well-known case of
the lusophone countries, most African countries 27 have
learned the lessons from the experience of Ghana and
Uganda.
The lusophone countries have been used as an example
by the experts who question the wisdom of introducing
VAT in Africa. Their criticism is mainly based on the difficulties
faced by small businesses in complying with the
VAT requirements, including:
– high tax compliance costs and the difficulties for,
sometimes illiterate, small business owners in maintaining
proper books and records;
– risks of harassment of these small taxpayers by tax
officials; and
– eventually, the incentive for small businesses to
operate in the informal sector. 28
Introduction of VAT in a country with a large informal
sector undoubtedly requires comprehensive and careful
22. In many developing countries, the difficulties faced by investors and
exporters in obtaining their VAT refunds are among the main reasons why
VAT exemptions are often widespread.
2 . These issues and their consequences for donors and developing countries
have been discussed by the International Tax Dialogue: Tax Treatment of
Donor-Financed Projects (ITD, 2006).
2 . Since the release of the first tax expenditure analysis in Morocco, several
VAT exemptions have been repealed and a step-by-step approach to phase out
reduced VAT rates has been developed.
2 . The Modern VAT (note 1), and Keen and Mintz, “The optimal threshold
for a VAT”, Journal of Public Economics (200 ).
26. Terkper,“VAT in Ghana: Why it Failed”, Tax Notes International (1996).
27. Including those where VAT was introduced in the mid-1990s (such
as Lesotho and Mauritius) and the countries where the threshold was significantly
increased in recent years (such as Kenya).
28. See Damme, Mirashi, and Orel (note ) and the problems faced by small
businesses in Mozambique in complying with their VAT obligations. In an
attempt to address these problems, a simplified VAT scheme was adopted in
that country, in addition to another simplified system for income tax.
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preparation. A key issue to be addressed during these
preparations is the establishment of a sufficiently high
registration threshold to address the difficulties mentioned
above. Box 1 provides a brief analysis of the consequences
of VAT in an economy with a large informal
sector. 29
Box 1. VAT and the informal sector
Experience shows that a modern VAT is a tool that is at least
equivalent, if not superior, to customs duties and traditional
turnover taxes in countries with a large informal sector. If
appropriately designed, VAT helps creating an environment
that takes into account the needs of small businesses and
encourages other businesses to operate in the formal sector,
while ensuring that operators in the informal sector contribute,
to some extent, to the tax revenues.
Small businesses
Adopting a high VAT registration threshold is a significant
first step towards simplifying the tax and accounting requirements
for small and micro businesses and reducing their
incentive to operate in the informal sector. Application of a
high registration threshold has very little impact on total VAT
revenues because the loss of tax revenue is limited to the tax
on the margin of small retailers. 30 Conversely, adoption of a
high registration threshold is not possible in a traditional
turnover tax system (especially a retail sales tax) because of
the obvious risks of revenue losses.
Businesses in the formal sector
The credit mechanism is an incentive for the businesses in
the formal sector to select suppliers who are registered for
VAT. That mechanism may also be an encouragement for
small businesses, whose turnover is below the registration
threshold, to register on a voluntary basis in order to increase
their supplies to registered businesses. 31
Informal operators
Contrary to the conclusions of those who criticize the simplification
and decrease of customs duties and the repeal of the
old turnover taxes, experience shows that VAT is a more
appropriate tool in an environment with a large informal sector.
VAT is just as effective as customs duties as a means to tax
imports of goods and capital equipment. Moreover, import
VAT is deductible from the VAT due on the supplies of registered
importers, but is a cost for importers operating in the
informal sector. VAT is therefore an effective means of collecting
at least some tax from informal operators, beginning with
VAT on their imports. 32 In the same manner, these operators
also contribute to the tax revenue because they cannot
deduct the VAT incurred on their domestic purchases of
goods and services (such as electricity, water, telephone
services, cars, gas, cement, etc.).
VAT registration threshold – best practices
In Africa, depending on the country’s history, three main
trends can be identified regarding the VAT registration
thresholds:
– very low thresholds in hispano and lusophone countries;
– moderate thresholds in anglophone countries; and
– high thresholds for supplies of goods and lower
thresholds for services in the francophone countries
(see Table ).
In most of these countries, the VAT registration threshold
is the predominant criterion to define small businesses.
By structuring the total population of businesses
on the basis of turnover – whether the level is set below
or above the threshold – the VAT provides a good framework
to develop important tax administration concepts,
including the exemption of small businesses and a simplified
tax regime for these businesses.
Based on a recent comparative study, the best practice
regarding the adoption of a VAT threshold would be the
following:
– adoption of a sufficiently high threshold, for example
in the range of the equivalent of USD 60,000 to
100,000;
– harmonization of the taxation principles applicable
to small businesses for VAT and income tax;
– adoption of a single threshold for supplies of goods
and the provision of services (because distinguishing
supplies of goods from services is often difficult
for small businesses and leads to complex and arbitrary
regulations); and
– elimination of discrimination based on corporate
structure by also applying the VAT threshold to
small corporate businesses (because this type of discrimination
is now history for a growing number of
businesses).
Taxation of small and micro businesses
Although discussion of the need to establish special tax
regimes for small and micro businesses is certainly not
new, this topic has received greater attention in recent
years from tax administrators and policymakers in many
countries, including those of the OECD and a number of
developing countries. To a large extent, the relatively
high costs born by small and micro businesses to comply
with the standard requirements of the tax system and the
costs of the tax administration to enforce these requirements
for this large group of taxpayers explain the growing
interest in this topic. Taxation of small businesses has
become an important component of the tax reform pro-
29. On these issues and the response to the criticism of Emran and Stiglitz
(note ), see Keen, “VAT Attacks! Second Best Perspectives on VAT”, International
Tax and Public Finance (2007).
0. In fact, experience shows that an increase in the threshold most often
helps increase the effectiveness of the tax administration and the revenue performance
of the VAT.
1. In most VAT systems, the option for voluntary registration is open to
small businesses that are able to keep proper books and records, issue invoices,
and have a good tax compliance history.
2. See Keen (notes 17 and 29). To increase the contribution of informal
operators to the tax revenues, several African countries also apply an advance
income tax that is collected by customs on imports. This advance payment is
creditable against the final income tax liabilities of the businesses in the formal
sector. It is therefore a cost for the businesses in the informal economy and
those who do not comply with their tax obligations.
. Bodin and Koukpaizan (note 12).
. Similarly, harmonized principles also apply to small businesses that voluntarily
register for VAT. These small businesses must also opt for the normal
tax and accounting regimes for income tax.
. After the first conference on VAT in March 200 , the organizations promoting
the International Tax Dialogue (ITD) have naturally focused their
work on small-business taxation during the second conference that was held
in October 2007, (www.itdweb.org/SMEconference).
18 INTERNATIONAL VAT MONITOR MAY/JUNE 2009 © IBFD

grammes developed in Africa: designing an appropriate
tax regime for small and micro businesses is a necessary
step towards facilitating the modernization of the VAT
system and the adoption of a high registration threshold.
The comparative study of the tax systems for small businesses
shows a great diversity of the existing regimes,
including: turnover taxes, patents, systems based on
physical indicators, taxes based on the business’ rental
value, etc. 6 Discussion and the exchange of views on this
topic are relatively new. The discussions during the ITD
conference confirm that there is not yet a credible guide
to best practices. While an in-depth evaluation of the
existing regimes is needed, those recently developed in
some countries should be given particular attention, for
example, the tax regime for small businesses that was
introduced in Madagascar in 2008. 7
4. Reform of Tax Administration – Progress and
Challenges
4.1. Impact of VAT on tax administration
VAT is certainly the most important tax reform that has
taken place in Africa in the past 20 years and it is not surprising
that its introduction has resulted in significant
changes for most tax administrations in this region. The
experts who question the appropriateness of VAT for
developing countries sometimes claim that similar
changes could have been made under the previous tax
systems, including the old turnover taxes. To a large
extent, these views reflect a lack of experience with the
actual situation of the tax and customs administrations
in Africa.
The collection procedures for income tax that were in
place prior to the introduction of VAT were primarily
based on negotiations between tax officers and taxpayers.
8 These procedures were particularly ineffective and
time consuming. They also provided significant opportunities
for corruption. Similarly, the old turnover taxes
were particularly complex and difficult to administer. In
several countries, they were supplemented by specific
excise taxes on numerous items (sometimes more than
20, such as gold, tea, sugar, cement, soap, etc). The administration
of these taxes was commonly based on physical
controls similar to those used by the customs administration.
These controls provided opportunities for multiple
visits to the taxpayer’s premises, which were frequently
accompanied by harassment and corruption. All
tax administration specialists who have provided technical
assistance in African countries before the introduction
of VAT can confirm that it was impossible to
develop a sound tax administration modernization
strategy in such a context.
Modernization of the tax administration has often
started with developing more effective and transparent
collection methods for VAT. It has also frequently
involved a fundamental change in the organizational
structure of the tax administration, especially integration
of functions that were previously fragmented
among several agencies. Another component of the
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modernization, which has also been significantly influenced
by the “structuring effect” of VAT, is the development
of the concept of “segmentation” of taxpayers. This
concept takes into account the characteristics of the various
categories of taxpayers, in order to adapt the compliance
programmes and the network of local offices to
the need of the taxpayers for specific services, and to the
different types of risks of non-compliance (see below). 9
When and how have these reforms started in Africa? In
several countries, substantial procedural and organizational
reforms were initiated during the preparatory
stage of the introduction of VAT. This was, for example,
the case regarding the transfer of the collection function
from the Treasury to the tax administration and the
establishment of the first large-taxpayers offices to facilitate
the introduction of VAT in francophone Africa (for
example, in Benin in 1990 and in Togo in 199 ). To some
extent, the creation of semi-autonomous revenue agencies
(the “revenue authorities”) in anglophone Africa in
the 1990s was also part of the plans that were developed
for the introduction of VAT (for example in Tanzania,
Uganda and Zambia).
Moreover, significant steps, such as the development of
taxpayer identification number systems, new filing and
payment methods, and new education and information
programmes, were also developed in several countries
during the preparations for the introduction of VAT, on
the basis of the available guides of best practices. 0 However,
in most African countries, including those where
preliminary steps had been taken prior to the introduction
of VAT or as part of the preparatory process, the
most fundamental reforms of the tax administration
were made after this introduction.
4.2. Modernization of the method of taxation
VAT is basically a self-assessed, account-based tax. Its
introduction has led to significant changes in the
method of taxation. The filing and payment regimes that
6. Bodin and Koukpaizan (note 12), and Marquez, Bareix and Villela, Recommendations
and Best Practices on Taxation of SMEs in Latin America, (Inter-
American Development Bank, 200 ).
7. This regime was developed for small and micro businesses with a
turnover below the VAT registration threshold (approximately USD 100,000).
Small businesses, which are defined as those with a turnover between USD
10,000 and the VAT threshold, are subject to a simplified (cash flow) income
tax. Micro businesses, which are defined as those with a turnover below USD
10,000, are subject to a presumptive tax based on the turnover. A similar
regime was also developed in Egypt in 2006, but it is unclear if a firm decision
has been made to launch it.
8. In anglophone Africa, these procedures were based on “administrative
assessment.” They provided for the verification of all returns prior to finalization
of the assessment and payment of the income tax due (often several years
after the return had been submitted). A similar concept (enrôlement) was also
used in several francophone countries, where the taxation process was further
complicated by the fragmentation of the assessment and collection functions
between two directorates reporting separately to the Minister of Finance.
9. Taxpayer segmentation is an application of a basic marketing concept
(market segmentation) to identify the unique characteristics of different
groups of clients and design a marketing strategy that is based on these characteristics.
Theoretically, this concept could have been developed from a
review of income tax data. However, these data were particularly poor and
inaccurate in most African countries.
0. In particular, VAT: Administrative and Policy Issues (IMF, 1991).
© IBFD INTERNATIONAL VAT MONITOR MAY/JUNE 2009
18

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are developed for VAT (generally monthly, at least for the
largest businesses) require the development of procedures
that are cost effective from the perspectives of
both the taxpayer and the tax administration. The
administrative assessment system that was used for
income tax and the physical controls for the old consumption
taxes were clearly inappropriate for VAT.
Despite the initial resistance and difficulties in some
countries, self-assessment procedures based on voluntary
compliance have been adopted for VAT.
Under a self-assessment system, taxpayers are expected
to comply with their basic tax obligations with only limited
intervention of tax officials. With access to advice
from the tax administration, taxpayers must calculate
their own tax liabilities; complete their tax returns; submit
returns and make the necessary payments to the tax
administration; and be prepared to justify their declaration,
if selected for audit. 1 These procedures help
increase the effectiveness and efficiency of tax officers,
who can concentrate on the detection and appropriate
treatment of non-compliance. To provide better services
to taxpayers, several countries, such as Nigeria, Rwanda,
Tanzania and Uganda, have also developed collection
systems through the banks. More recently, electronic filing
and payment procedures have also been initiated in
countries such as Mauritius, Morocco, South Africa and
Tunisia. These initiatives, which are now common practice
in other regions, are still at a preliminary stage in
Africa, but further progress can be expected in the coming
years.
Implementation of these procedures should be facilitated
by the development of new information technology
(IT) systems, which is still in an early stage in most
African countries. After major failures in the 1990s, a
second generation of IT systems is being developed since
the early 2000s in a few countries (such as Egypt,
Rwanda and Uganda) that have been able to prepare
comprehensive tax administration modernization projects
with the support of donors. 2 However, progress in
this area is still fragile and development of IT systems
capable of effectively supporting the work of the tax
offices is still essentially limited to the large-taxpayer
offices in most African countries.
Despite the need for more effective IT support, selfassessment
helps reduce the compliance costs for the
taxpayers and the need for personal contact with tax
officers, which also helps reduce opportunities for collusion.
The new procedures that were initially designed for
VAT now apply to most taxes, including personal and
corporate income taxes, in most countries. The organization
of the key functions needed to support selfassessment
and the design of strategies to implement
these functions are now at the core of the reform programmes
of these administrations.
4.3. Modernization of the organizational structure of
the tax administration
The organizational structure of most tax administrations
in Africa has been influenced by the principles
inherited from the colonial era as well as the technical
advice provided by foreign experts, which is often based
on tax administration practices in their own countries.
Thus, until recently, a common characteristic in the
anglophone and francophone countries was the fragmentation
of the tax administration responsibilities
between separate organizations:
– one organization responsible for income tax and
another for customs, VAT and excise duties in the
anglophone countries; and
– one organization in charge of most tax administration
functions and another responsible for the collection
of taxes (sometimes all taxes, sometimes only
direct taxes) in the francophone countries.
Integration of all main functions
The fragmentation of functions results in duplication
and unnecessary complexity for taxpayers, who must
deal with separate agencies to comply with their tax obligations.
It has also a significant negative effect on the
cost of tax administration and results in unnecessary
coordination problems that impede tax compliance. In
francophone Africa, the separation of assessment and
collection functions had a number of drawbacks and was
not compatible with the self-assessment procedure.
Experience has proved that coordination problems
between two agencies, which were often reluctant to
share information, were a significant impediment to the
indispensable quick action needed against non-compliant
taxpayers.
Similar coordination problems, including the use of different
taxpayer identification numbers, also had a significant
negative effect on compliance with income tax and
VAT obligations in the anglophone countries. VAT is
essentially an account-based tax and its control necessitates
a crosschecking of basic data (purchases, supplies
and investments) that is also used for the income tax.
This explains why integration of the most important tax
administration functions into a unified agency, and the
merger of VAT and income tax data and returns within a
single file are now seen as best practices in a vast majority
of countries. As shown in Box 2, the introduction of
VAT in Africa over the past 20 years has led to modernization
of the organizational structure of the tax administration
by merging key functions (including assessment
and collection) for the main domestic taxes
(including VAT, excise taxes and income tax) within a
unified, function-based organization.
1. The Modern VAT (note 1) and ITD (note 1).
2. These projects are being supported by the United States (USAID) and
United Kingdom (DFID) technical assistance programmes.
. Ironically, the United Kingdom and France have finally followed the
approach of their former colonies by ending the fragmentation of their revenue
administrations in 200 and 2008, respectively. The ambitious lines
taken in each country may however raise further questions as to the efficiency
of the:
– merger of income tax, VAT and excise tax operations into a single agency
dealing also with border control in the United Kingdom; and
– merger of tax administration and public expenditures management
within a new Direction générale des finances publiques (DGFIP) in France,
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Segmentation of taxpayers
The VAT facilitates the development of a more structured
picture of the taxpayer population, beginning with
categorization of businesses depending on their annual
turnover (i.e. above or below the VAT registration
threshold). Indeed, in many countries, especially in
Africa, the introduction of VAT has helped to develop a
better understanding of the “segmentation” of businesses
(i.e. their classification by size and turnover).
Box 2. Modernization of the organization of tax administration
in African countries
In a vast majority of African countries, administration of VAT
was simply assigned to the domestic tax administration
when the VAT law was adopted. 44 However, in some cases,
especially in the anglophone and francophone countries, the
introduction of VAT led to major changes in the organizational
structure of the tax administration.
Several francophone countries dealt with the separation of
the collection and assessment functions45 by adopting special
rules for VAT. This was the case in Ivory Coast and Senegal,
where, like in France, VAT collection was assigned to the general
tax directorate when the new tax was introduced. Other
francophone countries followed a more drastic approach by
transferring all tax collection functions to the tax administration
in the preparatory stage of the introduction of VAT (for
example in Benin and Togo in the early 1990s) or several
years after its introduction (for example in Mauritania and
Morocco in the early 2000s).
In the anglophone countries, the hesitations regarding the
most appropriate agency to administer VAT were an echo of
the particular situation in the United Kingdom, where the
administration of indirect taxes had been assigned to customs
officers due to the special circumstances in the 1940s. 46
However, after experience had proved that this model was
not appropriate for developing countries (such as Pakistan
and Malawi, where it became quickly obvious that the profile
and training of customs officers were not suitable for the
administration of domestic VAT), most anglophone countries
have created a new revenue directorate to administer VAT.
This separation was not questioned when semi-autonomous
revenue agencies were established in these countries in the
1990s, despite a few initiatives to improve the coordination
of the VAT and income tax directorates, and the development
of common human resources and support functions. However,
since early 2000, the majority of the anglophone countries
in Africa (including Egypt, Kenya, Malawi, Rwanda, Tanzania,
Uganda and Zambia) have embarked on a major
restructuring of their domestic tax administrations. In these
countries, the administration of VAT and income tax has
eventually been merged into a unified, function-based tax
directorate.
The concept of segmentation of taxpayers is a key component
of the strategies to modernize the tax administration
that have been developed since the second half of
the 1990s. The rationale for organizing tax administration
on the basis of specific categories of taxpayers
enables this administration to develop a compliance
strategy that includes the proper balance of service and
enforcement programmes that are needed to take into
account the particular risks and needs of each group.
After the creation of special units to administer the tax
affairs of large businesses, establishment of dedicated
offices and special programmes for medium-sized busi-
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nesses and for small and micro businesses is often seen
as an essential step towards modernizing the tax administration.
7
The segmentation of taxpayers facilitates a better understanding
of the respective needs of large, medium-sized
and small businesses in order to develop and provide
appropriate services and education programmes. It also
facilitates a better knowledge of the compliance risks
and, therefore, the development of specific enforcement
programmes to cope with these risks. In recent years, this
type of organization was introduced in several African
countries, including Algeria, Benin, Egypt, Malawi,
Rwanda, Sudan and Uganda.
4.4. Audit and VAT refund issues
Tax audit issues
An effective audit programme is an essential component
of a tax system that is based on self-assessment. Experience
of most African countries where self-assessment
has been introduced in the past 20 years, shows that
implementation of an audit programme is still a major
challenge. Several factors contribute to this situation,
including difficulties in recruiting and retaining qualified
auditors, and the concern that a too aggressive audit
programme can result in taxpayer harassment. 8 These
problems can be particularly acute in countries where
the tax administration is not able to pay an adequate
salary to auditors.
on the basis of a model similar to the one that was implemented in the
Ottoman Empire and the countries that had been influenced by this model
until recently (for example, Afghanistan, Lebanon, Romania and Syria).
. The administration of VAT was assigned to the domestic tax administration
in more than 90% of the countries where VAT was introduced, see The
Modern VAT (note 1).
. Separation of the collection and assessment functions was not compatible
with the development of the VAT’s collection method based on self-assessment.
It was based on the famous principle of “séparation des ordonnateurs et
des comptables”, which was developed in France at the beginning of the last
century.
6. The government decided to assign the administration of the consumption
tax and excises to the customs offices during the Second World War
because the customs officers did not have much work during that period.
7. The most common classification of businesses in many African countries
is the following:
– small businesses whose turnover is below the VAT registration threshold;
– medium-sized businesses whose turnover is above the registration
threshold but who do not have the characteristics of a “large business”;
and
– large businesses (that are now typically administered by a large taxpayer
office).
The fundamental characteristic of small and micro businesses is that they represent
the vast majority of all businesses (often from 80% to 90%), regardless
of their corporate structure, while the tax revenue generated by their activities
represents only a small portion of the total tax revenues (less than %–10% in
many countries). Conversely, the large businesses represent less than 1% of all
businesses and frequently generate more than 70% of total tax revenues.
Between these extremes, medium-sized businesses often represent 10–20% of
all taxpayers and frequently generate 20%–2 % of total tax revenues. This distribution
must of course be refined depending on the circumstances. Given
the differences in the tax base among countries according to their level of
development, the concept of business size is relative and the distribution of
micro, small, medium-sized and large businesses may vary significantly, see
Bodin and Koukpaizan (note 12).
8. The Modern VAT (note 1) and The VAT: Experiences and Issues (note 1).
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Moreover, the lack of an effective audit programme is
often the result of a weak political commitment and
inadequate support provided to the tax administration.
It can also be explained, in many African countries, by
the lack of an adequate legal and judicial framework to
protect the taxpayers’ rights, while ensuring that tax evasion
is effectively dealt with. This situation has a number
of drawbacks, beginning with the risk of non-compliance
and underreporting of the taxes due. These risks are
not limited to VAT, but they contribute to its inadequate
efficiency and to the problems faced by exporters and
investors in order to receive prompt payment of their
excess input VAT.
Against this background, two positive aspects of a VAT
audit programme must however be emphasized. The
first is the relative simplicity of VAT audits as compared
to audits for corporate or personal income tax or compared
to comprehensive audits for the purposes of establishing
the taxpayer’s total tax liabilities. Although the
skills required for VAT audits have some similarity with
those required for the other types of audits, they are significantly
less sophisticated. 9 The second positive aspect
is the potential impact of an effective audit programme,
including a well-designed VAT audit component, 0 on
income tax compliance in a unified tax administration,
where VAT and income tax data are included in a single
file for each individual taxpayer.
Processing of VAT refunds
Recent studies providing information on the level of
VAT refunds and current practices in this area (including
refund procedures, processing delays, approaches
developed to deal with the risks of fraud, etc.) have
resulted in a classification of the VAT systems of certain
regions and countries. 1 These studies confirm the difficulties
faced by most African tax administrations in
making refunds of excess input VAT to legitimate
exporters. The level of refunds (as compared to total
gross VAT receipts) was less than 10% in Africa in 1998-
2001, against % in the OECD countries and 17% in
Latin America in the same period.
While the level of refunds is largely dependent on external
factors, such as the degree of development and openness
of the economy, a review of the refund practices in
Africa shows that there is room for significant improvement
in most countries. The most frequent shortcomings
in these countries are the following:
– lengthy refund procedures. Refunds are sometimes
delayed by more than a year;
– unnecessarily complex procedures, including, for
example, the requirement to attach copies of previous
VAT returns, purchase and sales invoices, and
import declarations to the refund application form;
– lack of basic tools and methods to assess the risks,
beginning with a basic distinction between refund
claims made by legitimate exporters with a good
compliance history and other claims; and
– due to the lack of basic risk analysis, all VAT refund
claims are systematically subject to audit.
The complex procedures and excessive delays in processing
refund claims made by legitimate exporters
explain why it is difficult to eliminate undesirable practices
and features of the VAT system that contribute to
the poor effectiveness and efficiency of the tax administration,
including exemption for investments and transactions
in the EPZ, systematic VAT exemption for the
exploitation of natural resources and for supplies made
to exporters (achats en franchises) in several francophone
countries.
Adoption of a high threshold is the first measure to
address the criticisms of experts who stress the complexity
of the refund procedures for small businesses.
Another important step is the limitation of the refunds
to exporters and investors. However, in addition to legislative
provisions, substantial improvements in the processing
of VAT refunds require development of more
effective audit programmes based on risk management.
Despite encouraging initiatives, progress in this area has
generally been much slower than expected in African
countries. Further improvements in audit procedures
and the processing of VAT refunds will undoubtedly be
essential for a substantial improvement of the VAT efficiency
in these countries.
5. Conclusions
The introduction of VAT is the most important tax
reform that has taken place in a majority of African
countries in the past 20 years. While significant progress
is still needed to improve VAT‘s efficiency, the overall
results are positive: indirect tax collections have
increased, excise tax and customs duty systems have
been simplified, and VAT has provided a platform for the
development of a strategy to reform the tax administration
in many countries.
Lack of a credible alternative
The criticism of some economists against the introduction
of VAT is essentially based on a review of the problems
encountered with the VATs that were adopted in a
few countries, without taking into account the lessons
from experience and the good practices developed since
the early 1990s (i.e. a single rate, limited exemptions, a
high registration threshold, and a simplified tax regime
for small businesses whose turnover is below the VAT
registration threshold). Taking these features into
9. Surprisingly, those experts who often stress that the VAT is too complex
for developing countries, because tax administrators do not have the necessary
skills to audit the VAT, have never questioned the suitability of the personal
and corporate income tax in these countries.
0. In such programmes, VAT audits are typically short, issue-oriented
audits focusing on one or two monthly returns. They have a predominant
advisory component. The primary goals are to (1) ensure the taxpayer understands
VAT requirements (including registration, filing and payment, and
accounting and invoicing) and (2) correct anomalies that are identified. Cases
where significant underreporting is identified must be sent to a unit responsible
for comprehensive audits of all tax liabilities.
1. The Modern VAT (note 1), and Harrison and Krelove, VAT Refunds: A
Review of Country Experience (IMF, 200 ).
188 INTERNATIONAL VAT MONITOR MAY/JUNE 2009 © IBFD

account in designing VAT is crucial to ensure its successful
operation in Africa.
The experts who criticize the introduction of VAT in
Africa also underestimate the magnitude of the problems
faced by the tax and customs administrations in
enforcing the old taxes that were levied before the adoption
of VAT. A study of the tax administrations that had
not significantly changed since the colonial era shows
that there was no credible alternative for VAT. In a majority
of countries, the fragmented organization of the tax
administration was a source of inefficiency and compliance
problems. Similarly, the old taxes were based on
obsolete administrative assessment procedures regarding
the direct taxes and physical controls regarding the
old consumption taxes. These procedures resulted in frequent
contacts and negotiations with the taxpayers,
which were a source of harassment and corruption in
many African countries.
The argument that customs duties are a better tax instrument
than VAT in an environment with a large informal
sector also underestimates the potential of VAT, which is
actually a more effective tool in this type of situation.
From a tax administration perspective, experience shows
that, to a large extent, VAT is more effective than customs
duties: VAT applies to imports exactly like customs
duties, but its credit mechanism is only available to businesses
in the formal sector that are registered for VAT.
Ongoing reform of the tax administration
It must, however, be recognized that, despite the advantages
of VAT and the progress made since its introduction,
the efficiency of the tax is still below its potential in
most African countries. The necessary improvements
require further reform and modernization of the tax
administration, which is a complex and lengthy undertaking
in a majority of African countries. In these countries,
the introduction of VAT has provided a platform to
start an in-depth reform of the tax administration. With
the adoption of a modern consumption tax, which has
proved an effective, revenue-neutral mobilization
instrument, it is crucial to develop more effective and
efficient organizations and taxation methods that better
take into account taxpayers’ rights, and reduce the
opportunities for collusion between taxpayers and tax
officials.
These changes are complex, especially in Africa, where
progress is often fragile and slower than initially
expected. In spite of the difficulties, experience proves
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that reform of the tax administration is possible in this
region, provided that some key conditions are satisfied,
including:
– design of a sound modernization strategy and action
plan;
– establishment of a well-structured project and
appointment of highly-skilled managers to lead the
reform process;
– allocation of appropriate project resources, including
well-prepared technical assistance, if needed;
and, above all,
– a sustainable political commitment during the entire
reform process.
Unfortunately, these conditions are not always fulfilled.
Another factor that is proving increasingly important in
African countries where the reform of the tax administration
is perceptible is the change of governance structure.
The advantages of the revenue authority model that
was implemented in the anglophone countries in the
1990s were not visible until recently, largely because of
the lack of serious tax administration reform efforts during
that period in these countries. However, since the
early 2000s, a series of substantial changes, including
merging the administration of VAT and income tax
within a unified, function-based organization, and the
introduction of self-assessment procedures for all taxes,
have been carried out in many of these countries
(including Kenya, Malawi, Rwanda, Uganda and Zambia).
In such a context, the change of governance structure
may eventually become more attractive. By giving
more flexibility to the tax administration to carry out its
modernization, the change of governance structure
could lead to more sustainable improvements in the professionalism
of tax officers and their managers, in the
absence of which the benefits of the necessary organizational
and procedural changes remain theoretical.
Indeed, the various initiatives taken to implement organizational
and procedural changes in line with best practices
in the tax administrations that follow the traditional
model of the civil service have not led to the
expected modernization. The lack of operational autonomy
to allocate budget resources and the lack of flexibility
to provide adequate salaries and incentives, as well as
the obstacles faced to reform the organizational
structure and office network have proved serious impediments
to the necessary modernization of the tax administration,
which is indispensable for an actual improvement
of the VAT efficiency.
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