The Efficiency of VAT Implementation: A Comparative Study of Central and Eastern European Countries in Transition

IMF Working Papers, July 1, 1996

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Paper presents calculations of the efficiency with which value-added taxes (VAT) are collected in five transition economies in Central and Eastern Europe.
Compares actual VAT revenues in 1994 with hypothetical revenues that would have resulted if the statutory VAT rates had been applied without any revenue leakage.
The five countries fall into two broad groups:
- one exhibiting relatively high collection efficiency, and
- the other relatively low efficiency.
Lack of detailed information on tax rules and consumption patterns limits definitive conclusions.
The impact of exemptions is shown to likely strengthen the comparative results.

Core comparison: actual VAT revenues in 1994 versus counterfactual revenues under full application of statutory VAT rates (i.e., no revenue leakage).
Analysis relies on available information on statutory VAT rates, observed revenues, and available consumption data; gaps in detailed tax-rule and consumption-pattern data are acknowledged.

Number of countries analyzed: 5.
Year of revenue data compared: 1994.
Countries segregate into two groups by collection efficiency:
- Group A: relatively high collection efficiency.
- Group B: relatively low collection efficiency.
Exemptions likely play a material role in reinforcing the comparative efficiency outcomes.

Measurement of VAT collection efficiency using the gap between actual revenues and counterfactual full-rate revenues can identify relative performance across transition economies.
Detailed information on tax rules and household consumption patterns is important for definitive assessment of VAT efficiency.
Consideration of the role and scope of exemptions is necessary when interpreting cross-country VAT efficiency comparisons.