A new study shows that Value-Added-Tax can be used to educate people outside the reach of direct income taxation on their role as tax-paying citizens. Improved tax compliance could be the outcome.
As aid continues to dwindle day after day, raising domestic tax revenues is increasingly becoming an important priority for most African countries. Raising enough taxes is, however, dampened by the fact that there is widespread tax avoidance and evasion.
This, combined with the fact that most African economies are largely informal, means that a lot of tax revenue is foregone by the taxman. With such a large informal economy, governments have to increasingly rely on indirect taxes like the Value-Added-Tax, commonly referred to as VAT.
VAT is the biggest source of indirect tax in most African countries. About 80 percent of the countries in sub-Saharan Africa levy VAT, which contributes about one-quarter of the total tax revenue for these economies.
Researchers link the popularity of the VAT in sub-Saharan Africa, due to its ability to enhance tax compliance, in comparison to more narrow-based taxes such as personal and corporate income taxes
However, only a tiny fraction of people and companies bear the large proportion of the tax burden in these countries. This could be due to weak administrative capacity to collect taxes and the fact that the rest of the population are either too poor to remit or lack knowledge on the need for how to pay their taxes.
A new study by the ICTD and CMI researchers Odd-Helge Fjeldstad and Thor Olav Iversen, however, has found that improved knowledge about the tax system helps improve people’s willingness to pay tax, and this is especially true for Value-Added-Tax.
According to the researchers, exposure to VAT makes people take a greater interest in tax issues and makes them more willing to pay tax. Making the VAT more visible therefore, can be an efficient and important tool in building a tax-paying culture.
“Taxpayer education is an important part of addressing tax compliance, and is a central component of revenue administrations’ effort to build taxpaying culture in developing countries,” the study mentions.
Taxpayer education efforts by revenue agencies
Appreciating the fact that taxpayer education is key to building and encouraging a tax-paying culture, revenue authorities in the region are employing various approaches in their taxpayer education in order to bridge the information gap. They are co-operating with media, religious authorities and artists to sink the taxpaying messages. They also use various channels like the media (TV and radio programmes), tax clubs in schools and tax information meetings in shopping centres.
The Kenya Revenue Authority (KRA) for instance, has a taxpayers’ education programme, which seeks to create tax awareness in order to enhance voluntary tax compliance. The Mozambique Revenue Authority engages existing and potential taxpayers on radio and TV broadcasts to increase uptake, whereas the Tanzania Revenue Authority (TRA) is using the media to broadcast radio programmes on tax, and has started tax clubs in secondary schools to improve tax knowledge amongst the young citizens.
“We need to focus on educating the future generations of taxpayers. The current generation is lost.”
(A quote by a tax officer in the Zambia Revenue Authority (ZRA))
How VAT can be used as an instrument of taxpayer education
In order to be effective, taxpayer education strategies should be tailored to fit different segments of taxpayers paying different taxes. Indeed, VAT has a wide reach as every citizen - urban and rural as well as the formal and informal businesses - are exposed to it. VAT is therefore suggested to be a useful starting point when tailoring tax education strategies for groups that have not been pre-disposed to taxes, especially those in the informal sectors, as this may help improve awareness of personal obligations and contributions. For instance, when an informal trader buys supplies from a registered company, the trader pays VAT via the goods and services they purchase.
Evidence that VAT-related tax knowledge encourages greater tax compliance attitude among citizens has been observed in Kenya, Uganda, Tanzania and South Africa.
However, it is taxpayer’s education that the researchers found to be more useful in driving or addressing tax compliance, and as a central component of revenue administrations’ effort to build taxpaying culture. Overall, improved tax knowledge could in turn foster greater citizen engagement around matters of taxation, public spending and good governance, and increased participation by people in the informal economy.
Education, however, is only one component of a broader strategy to enhance taxpayers’ compliance. Tax administrations therefore need to device a mix of strategies in addition to taxpayer education, such as improved tax legislations, simplified tax payment procedures as well as tax audits.