Encouraging Formal Invoicing and Reducing the VAT Impact on Low-Income Individuals

32 Pages Posted: 25 May 2021

See all articles by Ricardo Fenochietto

Ricardo Fenochietto

International Monetary Fund (IMF) - Fiscal Affairs Department

Juan Carlos Benitez

International Monetary Fund (IMF)

Date Written: February 1, 2021

Abstract

This paper analyses and compares two different groups of tools, the first to encourage the use of invoices (or payment systems) and the second to refund the VAT to low-income individuals. The analysis contributes to the existing literature by providing a clear characterization between these two groups of tools that are too often misunderstood and offers clear guidance to policymakers on the benefits and pitfalls of them based on available empirical studies and novel data analysis. Briefly, the first group includes a set of regressive and distortive tools (such as, allowing deducting the VAT paid on personal consumption from the PIT and reducing the VAT rate for using electronic means of payments or registration), while the second group includes tools that are less distortionary and improve income distribution (tax credits and VAT rate reduction targeted only at low-income individuals). This paper also finds that allowing the deduction of personal consumption against the PIT’s taxable base (i) did not impact positively the VAT revenue in Guatemala and (ii) worsens the income distribution in Ecuador.

JEL Classification: D04, D31, H24, H26, H25, E25, E21, E50

Suggested Citation

Fenochietto, Ricardo and Benitez, Juan Carlos, Encouraging Formal Invoicing and Reducing the VAT Impact on Low-Income Individuals (February 1, 2021). IMF Working Paper No. 2021/040, Available at SSRN: https://ssrn.com/abstract=3852768

Ricardo Fenochietto (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Juan Carlos Benitez

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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