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

IMF Working Papers, February 19, 2021

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The paper analyses and compares two groups of tools:
- First group: tools to encourage the use of invoices (or payment systems).
- Second group: tools to refund the VAT to low-income individuals.
The analysis aims to provide a clear characterization between these two groups of tools and offers guidance to policymakers based on available empirical studies and novel data analysis.

Characterization of tool groups:
- First group includes a set of regressive and distortive tools, for example:
- allowing deducting the VAT paid on personal consumption from the PIT
- reducing the VAT rate for using electronic means of payments or registration
- Second group includes tools that are less distortionary and improve income distribution, for example:
- tax credits
- VAT rate reduction targeted only at low-income individuals
Empirical findings on specific measures:
- Allowing the deduction of personal consumption against the PIT’s taxable base:
- (i) did not impact positively the VAT revenue in Guatemala
- (ii) worsens the income distribution in Ecuador

Policymakers should differentiate clearly between:
- tools aimed at increasing invoicing/payment-system usage (first group), which tend to be regressive and distortionary, and
- tools aimed at protecting low-income individuals from VAT burden (second group), which are less distortionary and can improve income distribution.
Preference is indicated for:
- tax credits and VAT rate reductions targeted only at low-income individuals over measures such as allowing VAT paid on personal consumption to be deducted from the PIT or broad VAT rate reductions linked to electronic payment use.

Subjects: Consumption, Credit, Income, Money, National accounts, Personal income tax, Taxes, Value-added tax
Keywords: Asia and Pacific, charge VAT, Consumption, Credit, electronic invoice, Europe, Global, Income, Middle East and Central Asia, Personal income tax, PIT base, PIT liability, PIT revenue, PIT tax credit, reduction program, Value-added tax, VAT compliance, VAT credit, VAT deduction from PIT, VAT impact on low-income individuals, VAT impact on low-income individuals., VAT invoice, VAT non-compliance, VAT rate reduction for electronic payments, VAT revenue, Western Hemisphere, WP

IMF Working Paper by Ricardo Fenochietto, "Encouraging Formal Invoicing and Reducing the VAT Impact on Low-Income individuals", February 19, 2021.