Tax Compliance, VAT Revenues and Business Development in Tanzania

Value Added Tax (VAT) accounts for about a fourth of all tax revenues in countries in Sub-Saharan Africa (SSA). Studies find, however, that there is potential to collect substantially more revenues from VAT in most countries in the region. A major challenge facing revenue administrations in Africa is widespread non-compliance. 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 in 2010 was the introduction of Electronic Fiscal Devices (EFDs) - tills that record and transmit data on sales transactions directly to the tax administration and issue VAT-receipts. Despite the EFDs, VAT collection has not improved as expected. A possible explanation for the limited success is that businesses often do not use the machine to issue receipts, and that customers do not request receipts. The current project suggests a new approach to increase the issuance of EFD receipts, by rewarding customers to ask for them. In collaboration with the Tanzania Revenue Authority (TRA), we have conducted a VAT receipt lottery for customers in Tegeta Tax Region in Dar es Salaam. VAT receipts are used as tickets in the lottery. The project studies the effect of the lottery on VAT collection and tax revenues by analyzing tax administrative data from TRA and survey data on businesses’ receipt printing behavior. In addition, we 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,

Tax evasion is a widespread problem worldwide and particularly in low income countries. The present project focuses on Value Added Tax (VAT). The 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 been striving to improve the effectiveness of the VAT regime 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. Based on our previous research, we hypothesize that incentivizing customers to request receipts maybe a very efficient way to improve VAT compliance. We have a unique opportunity to collaborate with the Tanzania Revenue Authority (TRA) and implement a large field experiment where businesses in randomly selected areas in Tanzania participate in a VAT receipt lottery for customers: VAT receipts are used as tickets in the lottery, and the probability of winning is proportional to the amount spent, to incentivize customers to ask for receipts. The idea is that, once a receipt is issued, the transaction is recorded and observable to the government, making enforcement easier. We will study the effect of the lottery on VAT collection and tax revenues. In addition, we will examine the effect of taxation on business development by investigating how the VAT affects the prices paid by the customers, business outcomes and formalization.