Estimating the Base of the Value-Added Tax (Vat) in Developing Countries: The Problem of Exemptions
18 Pages Posted: 15 Feb 2006
Date Written: February 1991
Developing countries with VATs typically exempt a large number of goods and services. Following a brief discussion of the rationale for exemptions, this paper presents a formula for the base of a VAT with exemptions. Two basic adjustments must be made to the base without exemptions: subtraction of the value of sales to consumers of exempt industries and addition of intermediate sales of taxable inputs to exempt industries. The paper concludes with a derivation of the elasticity of a VAT with exemptions with respect to aggregate consumption and a discussion of the implications of technological change for the VAT base.
JEL Classification: 323
Suggested Citation: Suggested Citation