The Customer is King: Evidence on VAT Compliance in Tanzania

Like governments in many other African countries, the Government of Tanzania has been striving to improve the effectiveness of its value added tax (VAT) regime by reducing tax evasion through a combination of measures, including improved tax legislation and more effective administrative processes. A key initiative was the introduction of Electronic Fiscal Devices (EFDs) in 2010. It was expected that the new technology would be beneficial to both the Tanzania Revenue Authority (TRA) and business people by improving VAT compliance and reducing administrative and compliance costs. However, VAT collection has not improved as expected. In this paper, we examine EFD compliance among businesses that have an EFD and identify factors that influence compliance. An innovation in this study is that the research design allowed us to directly observe EFD usage, an important aspect of VAT compliance. Our enumerators waited for customers departing from business premises, and then checked their receipts, interviewed them and interviewed the businesses. This design enabled us to observe each business’s actual compliance in issuing EFD receipts, thus circumventing the problem of dishonest reporting, which is common in self-reported survey data. We find that EFD compliance is strongly associated with the customer’s perception of detection and penalty risks, and with the business operator’s perception of other businesses’ compliance behaviour.UKAIDBill and Melinda Gates Foundatio

Customers play an important role in shaping firms’ VAT compliance

Value added tax (VAT) is one of the main modes of raising tax revenue worldwide but has significantly underperformed as a revenue collection tool in Africa. Non-compliance by taxpayers is a major challenge. This Misum Academic Insight explores the extent to which Tanzanian businesses are VAT compliant and the factors explaining compliance

The Customer is King: Evidence on VAT Compliance in Tanzania

Value Added Tax (VAT) has emerged as one of the main modes of raising tax revenue worldwide, but has significantly underperformed as a revenue source in African countries. To improve compliance, Tanzania has introduced Electronic Fiscal Devices (EFDs), which automatically transmit information about business transactions to the tax administration. However, VAT collection has not improved as expected. In this paper, we examine EFD compliance and identify factors that influence it. An innovation in this study is the direct observation of EFD usage: our enumerators waited for customers departing from business premises, and then checked their receipts, interviewed them and interviewed the businesses. This design enabled us to observe each business’s actual compliance in issuing EFD receipts, thus mitigating the problem of dishonest reporting of compliance, which is common in self-reported survey data. We find that EFD compliance is associated not only with the business’s perception of other businesses’ compliance and its satisfaction with public services, but also, and more strongly, with the customer’s perception of detection and penalty risks

Customers play an important role in shaping firms’ VAT compliance

Value added tax (VAT) is one of the main modes of raising tax revenue worldwide but has significantly underperformed as a revenue collection tool in Africa. Non-compliance by taxpayers is a major challenge. This Misum Academic Insight explores the extent to which Tanzanian businesses are VAT compliant and the factors explaining compliance. Practical problem: The Government of Tanzania is striving to improve the effectiveness of its VAT regime and reduce tax evasion through a combination of measures. Initiatives have included improved tax legislation and more effective administrative processes. Electronic Fiscal Devices (EFDs) were introduced in 2010 with the ambition of reducing administrative and compliance costs for the Tanzania Revenue Authority (TRA) and businesses. They were designed to ensure more accurate reporting of VAT by automatically transmitting information about sales and other transactions to the TRA. However, VAT collection has not improved as expected after the introduction of the EFDs. For the EFDs to improve VAT compliance it is crucial that businesses use them to register transactions, which is required by legislation.The insight is based on our article in World Development: https://www.sciencedirect.com/science/article/pii/S0305750X19304905?via%3Dihubhttps://www.hhs.se/contentassets/830436ae38564d2b9856dfd9f369c2bc/misum-academic-insights_customer-is-king_final.pdfhj2022Taxatio