The Devil is in the Detail: An Analysis of VAT Compliance Costs for SMEs in a Developing Nation

The Devil is in the Detail: An Analysis of VAT Compliance Costs for SMEs in a Developing Nation

Higher compliance costs for a value-added tax (VAT) through excessive government regulations are often portrayed as one of the important factors that affect small and medium enterprises (SME), resulting in potentially significant non-compliance and under representation in terms of their registration for VAT and their contribution to the VAT revenue collected. However, while the existing literature makes reference to estimating VAT compliance costs for SMEs in developed economies, there is little detailed evidence of its impacts on developing economies such as Bangladesh. This study utilises a mixed methods approach involving both compliant and non-compliant VAT payers to estimate the VAT compliance costs for SMEs in Bangladesh across a number of characteristics. The results demonstrate that VAT compliance costs for Bangladeshi SMEs are regressive and that manufacturers have a higher burden of monetary compliance costs followed by those in the trading sector. The study also finds that as the size of business increases, the VAT compliance costs for compliant taxpayers increase as compared to non-complaint taxpayers. The analysis and policy recommendations emerging from these findings may provide some useful lessons for Bangladesh and other developing countries in designing a better VAT regime for SMEs.

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