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

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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 Articles 179
Articles 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). 180 INTERNATIONAL VAT MONITOR MAY/JUNE 2009 © IBFD
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