Once the base of a VAT is determined, several key design issues such as the level and structure of rates must be resolved. Many lessons for VAT design suggested by experience in developed countries are relevant everywhere, but some need to be reconsidered in developing and transitional countries, in which tax reality is even more dominated by administrative capacity and political necessity. As Laffont (2004) remarked in surveying another important policy issue (public utility regulation), not only do we have surprisingly little solid empirical knowledge about the critical factors determining what policy design is best for any particular country, but even the relevant economic theory remains rather sketchy. Moreover, outside experts often know even less about the relevant political economy context. In this chapter we consider some of the important aspects of VAT design that require close analysis of the country in question: rates, thresholds, exemptions, zero-rating, and excises.

RATES

Expert advice on VAT rates is simple: there should be only one rate. (Actually, this means that there should be two rates, since a zero rate should be imposed on exports.) The uniformity of this ‘uniform’ rate advice rests on the assumption that the administrative and compliance costs of rate differentiation outweigh efficiency and equity arguments that might be made for such differentiation. Administratively, more rates seem clearly to be associated with higher administrative and compliance costs and hence reduced VAT ‘efficiency’ in the terms discussed in Chapter 4 (Cnossen 2004).