Front Matter Page

Fiscal Affairs Department

Contents

• Summary

• I. Introduction

• II. Structural Aspects of the VAT

  • 1. Design of the tax: characteristics and development

  • 2. Major features of the tax

    • a. Minor taxpayers

    • b. Treatment of agriculture and the zero rate

    • c. Border (zona fronteriza) and free zone rates

    • d. Multiple rates

• III. Exogenous Influences on the Tax Base

• IV. Estimation of the VAT Base

• V. Summary of Conclusions

• Text Tables

  • 1. Mexico: Structure of Production, 1980-84

  • 2. Mexico: Patterns of Demand and Supply, 1980-83

  • 3. Mexico: Structure of Imports, 1980-83

  • 4. Mexico: Base of the Value-Added Tax

• Appendix. Calculations for Estimating the VAT Base

• Appendix Tables

  • 5. Mexico: Calculations for the Base of the Value-Added Tax, 1983

  • 6. Mexico: Calculation of Commerce Exemptions, 1983

  • 7. Mexico: Exemptions in Selected Sectors, 1983

  • 8. Mexico: Intermediate Goods to be Credited: Agriculture, 1983

  • 9. Mexico: Input-Output Coefficients, 1980

  • 10. Mexico: Calculations for the Base of the Value-Added Tax, 1980

  • 11. Mexico: Exemptions in Selected Sectors, 1980

• References

Summary

The popularity of the value-added tax (VAT) has increased rapidly since the 1960s as its introduction has spread across Europe, Latin America, Africa, and Asia. Every year more countries introduce the VAT. Its ramifications for allocative efficiency, inflation, income distribution, and tax administration have been much discussed in the literature. One area which has not received much attention, however, is the calculation of the VAT base.

Authorities are often satisfied with the initial revenue collections from a VAT, especially when they are compared with the revenues from the taxes the VAT usually replaces. But it is forgotten that the base of the VAT is likely to be broader than those of the replaced taxes, and its revenue potential therefore may be higher than actual collections. While exogenous economic trends, such as changing patterns of production, consumption, and imports, as well as the changing share of exports in total production would certainly affect the VAT base, a calculation of the theoretical base of a VAT, given its structure, should help the authorities in gauging how much of the base they are actually capturing. This, in turn, would indicate how much more revenue may realistically be obtained from this tax.

The calculation of the VAT base is necessarily dependent on the availability of reliable and detailed national accounts data and input-output tables. This is because the VAT mechanism normally requires that tax paid on inputs be credited against tax payable on outputs. In this paper, a methodology for the calculation of the VAT base is developed for Mexico for 1980 and 1983 (two years when the VAT structure was considerably different), after a discussion of various external influences that might have affected the VAT base in those years. Provided data are available, this methodology could be applied in other countries to assess the true revenue potential from a given VAT structure.