The Hidden Compliance Cost of VAT: An Exploration of Psychological and Corruption Costs of VAT in a Developing Country

Abstract

A Value Added Tax (VAT) is seen as critical in providing the tax revenue base for governments, especially developing nations. However, prior research about VAT compliance costs has largely occurred in developed nations and has generally excluded psychological and corruption costs. This article reports a study which measures and reflects upon the psychological costs both in quantitative and qualitative terms for small and medium enterprises in a developing nation, Bangladesh. The cost of corruption is also considered. The findings of this study provide valuable insights as to what is the true compliance cost for VAT in a developing country.

Keywords: small business, private enterprise, VAT, compliance cost, Bangladesh

JEL Classification: K34, H25, H26, L20, L51