Tax Articles

Value Added Tax >> Export

Equity Impact of the Value-Added Tax in Bangladesh

Date Added: 2011-05-08

By 1990, more than 50 countries in the world had adopted VAT of some kind (Tait (1991), pp. 2-3). With the introduction of the VAT by countries of Eastern Europe and the former Soviet Union (FSU) in recent years, the tax is becoming universal. The uniform taxation associated with VAT rates is likely to reduce the need for detailed information and thus the cost of administration and evasion. This VAT system is distinct from other forms of commodity taxes (e.g., excise and sales tax) that exist in many developing countries, which involve taxation of inputs and a myriad of tax rates. Even if a VAT has several attractive features, like uniformity, tax neutrality, and simplicity in tax administration, which provide an elastic and buoyant source of revenue to the government, it also has a negative feature: by emphasizing uniformity, a uniform VAT ignores equity or income distributional issues relevant for developing countries. The theory suggests that if a country does not have a well-developed, effective, and optimally adjusted income tax and transfer system--to tackle equity concerns with the direct tax system--indirect taxes should be differentiated to incorporate the distributional considerations in addition to the usual efficiency concerns.

External Link