A VAT revenue simulation model for tax reform in developing countries

In this paper, we develop a model to simulate policies and revenues for a v alue-added taxes (VAT) system in countries that have an indirect tax system containing sales, excise taxes, and tariffs. An application of the model i s carried out for Nepal, which has recently introduced the VAT to replace i ts sales tax system and rationalize its excise and tariff systems. The stud y shows that, in a developing country, tax policies that might seem very re alistic and politically noncontroversial are likely to yield a very narrow tax base. IF a government of a developing country wants to rely more on the VAT over time, it must move aggressively to broaden the base and enhance c ompliance. (C) 2000 Elsevier Science Ltd. All rights reserved.