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

– 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
Articles
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.
© IBFD INTERNATIONAL VAT MONITOR MAY/JUNE 2009
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