Reforming Value Added Tax System in Developing World: the Case of Nepal

Abstract

Value Added Tax (VAT) has become an integral part of domestic tax reforms in many developing countries. Taking the case of Nepal, VAT associates a number of refunds to different private sector activities for promoting investment in higher growth and export potential sectors. Total refund, more specifically, export refund has a significant positive impact on the level of GDP. Furthermore, non-agricultural GDP has strong positive influence to VAT C-efficiency ratio. Likewise, higher the VAT gap, lower is the C-efficiency ratio. If C-efficiency is improved coupled with higher compliance, the capability of the government is strengthened in domestic revenue generation.