Customers play an important role in shaping firms’ VAT compliance

Abstract

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.