外文翻译-发展中国家税制改革下增值税收入仿真模型A VAT Revenue Simulation Model for Tax Reform In Developing Countries

外文文献原稿和译文原稿开展中国家税制改革下增值税收入仿真模型AVATRevenueSimulationModelforTaxReformInDevelopingCountriesGlennP.Jenkins[Abstract]:Inthispaper,wedevelopamodeltosimulatepoliciesandrevenuesforavalueaddedtax(VAT)systemincountriesthathaveanindirecttaxsystemcontainingsales,excisetaxes,andtariffs.AnapplicationofthemodeliscarriedoutforNepal,whichhasrecentlyintroducedtheVATtoreplaceitssalestaxsystemandrationalizeitsexciseandtariffsystems.Thestudyshowsthat,inadevelopingcountry,taxpoliciesthatmightseemveryrealisticandpoliticallynoncontroversialarelikelytoyieldaverynarrowtaxbase.IfagovernmentofadevelopingcountrywantstorelymoreontheVATovertime,itmustmoveaggressivelytobroadenthebaseandenhancecompliance.[Keywords]:VATrevenue,Taxreform,model,NepalⅠ.INTRODUCTIONImporttariffsandexcisetaxesoftenconstitutethemostimportantrevenuesourcesindevelopingcountries.Becauseofgrowingconcernsinrecentyearsabouteconomicefficiencyandtaxsimplicityinacompetitiveandintegratedworldeconomy,manycountriesareloweringtradetaxesandreplacingdistortedexcisetaxeswithconsumption-typeVAT.Withrespecttothelatter,oneofthemostimportantquestionsistherevenuepotentialofalternativedesignsofthisnewtaxasgovernmentsattempttoreplaceorenhancethelevelofrevenuesgeneratedbytheircurrenttaxsystem.ThepotentialrevenuewhichcanberaisedfromtheVATdependsonanumberoffactors,suchashowbroadthetaxbasewillbeandtheextenttowhichbusinesseswillcomplywiththetax.Thisissuehasnotbeenwidelydiscussedinthepublicfinanceliterature.ThemainpurposeofthispaperistoprovideananalyticalframeworkwhichcanbeusedtoestimatethepotentialtaxbaseandassociatedrevenuesforaVATinatypicaldevelopingcountry.Themodeldevelopedforthispurposeshouldbedetailedenoughtofacilitatetheestimationofthepotentialrevenuesforalternativetaxoptions.Suchamodelcanthenbeusedtoassistdecisionmakersinsettingtheirtaxpolicies.Toillustrate,themodelisappliedtotheeconomyofNepal.WechoseNepalbecauseitistypicalofmanydevelopingcountries,havingverylimitedstatisticaldataandmovingfromahighlydistortedindirecttaxsystemtoaVAT.Ⅱ.ALTERNATIVEAPPROACHESTOTHEESTIMATIONOFAVATBASEThepotentialtaxrevenueofaVATisgreatlydependentonthenumberandleveloftaxrates,thescopeofthetaxbase,andthedegreeoftaxcompliance.TheproposedVATisassumedtobeamultistageconsumptiontaxbasedonthedestinationprinciple,similartoaEuropean-styleVAT.Thetaxisappliedtothesalesofgoodsandservicesatallstagesoftheproductionanddistributionchain.Ateachstage,vendorsareabletoclaimtaxcreditstorecoverthetaxtheypaidontheirbusinessinputs.Asaresult,thetaxsystemisineffectapplyingthetaxonlytothevalueaddedbyeachvendor.Sincetheonlytaxthatdoesnotgetrefundedisthetaximposedonfinalconsumption,thetaxisequivalenttotheretailsalestaxonfinalconsumption.Whileimposingataxatadestinationprinciple,importsaretaxedinthesamewayasdomesticallyproducedgoods,andexportsarenotsubjecttotax.Therefore,thetaxessentiallyappliestogoodsandservicesconsumeddomestically.AcommonfeatureofthetaxbaseinmostVATcountriesistonottaxanumberofimportantgoodsorservicesbecauseofpoliticalandsocioeconomicconsiderations,technicaldifficulties,oradministrativecomplexity.Thesegoodsandservicesgenerallyfallintotwomajorcategories,zero-ratedandtaxexempt.Forzero-ratedcommodities,theVATisnotleviedonthesellingpriceoftheseitems.Thevendor,however,receivesfullcreditfortheVATpaidoninputsusedinproduction.Ifzero-ratedsalesoccuratanintermediatestage,purchaserswouldnothaveacredittodeductagainstanysubsequenttaxdue.Thiswould,infact,provideacashflowcostandbenefittothevendorandpurchaser,respectively.Thenetrevenueimplicationsforthegovernmentwouldneverthelessbenil.Bycomparison,ifzero-ratedsalesoccurattheretailstage,itwouldeffectivelyremoveallthetaxburdenfromconsumersandthegovernmentwouldloseallthetaxrevenuefromthesalesofthesegoodsandservices.Forconceptualandtechnicaldifficulties,countriesemployingaVATgenerallyexemptthedomesticsalesoffinancialintermediationandinsuranceservices.Foradministrativeandcompliancesimplicity,mostVATcountriesalsoexemptsmallbusinessesfromthetax.Whenthesegoodsandservicesareexempted,theVATisnotappliedtothesesales.Unlikezero-ratedgoodsandservices,vendorsofexemptproductsarenoteligibletoreceiveanycreditforthetaxespaidontheinputsusedtoproducethatgoodorservice.Thedenialofinputtaxcreditsincreasestheproductioncostforthevendor,althoughthevalueaddedofthevendorescapestax.Likezero-ratedsales,taxexemptioncanoccurateitheranintermediateortheretailstage.Considerthetaxexemptionattheretailstagewheregoodsaresolddirectlytoconsumers.Onlythevalueaddedattheretailstagewillnotbesubjecttotax.Incontrast,iftaxexemptsalesoperateattheintermediatestagesoftheproduction-distributionchain,salesbythesubsequentbusinessesacquiringthegoodsareeffectivelyovertaxedtotheextentthattheinputspriortheexemptstagearenotcreditable.Asaresult,thetaxbaseisnotreduced,butisaugmentedbythecascadingeffect.Thegovernmentcouldultimatelycollectagreateramountoftaxrevenuethanitwouldotherwise.MultipletaxratesareacommonfeatureofsomeVATsystemsinthedevelopingcountries.Itisnotuncommontoobservethatalowerrateisappliedtogoodsorserviceswhichareregardedasthenecessitiesoflife.Atthesametime,thereareluxurygoodswhichmaybesubjectedtoahigherrateofVAToralternatively,anon-increditableexcisetax.Threealternativeapproachescanbeusedtoestimatethetaxbaseandassociatedrevenues,forwhichinput-outputtables,nationalaccountsandfamilyexpendituresurveydataareoftenrequired.Thefirstapproachissimplytoconstructanaggregatetaxbase.ItbeginswiththeGrossDomesticProduct(GDP)oftheeconomy,whichisthesumofthevalueaddedinthedomesticproductionofallgoodsandservices.BecauseweareconsideringadestinationprincipleVAT,weneedtosubtractexportsandaddimportstotheGDP.ForaconsumptiontypeVAT,thebaseisalsoreducedbythegrosscapitalformationoftheprivatesector.Thebaseisfurtherreducedbyzero-ratedorexemptedconsumptionexpenditures.Sincevendorsofexemptedgoodsandservicesareunabletoclaimanycreditsfortaxespaidontheinputsacquiredtoproducethatgoodorservice,thetaxbasewillhavetobeupwardadjusted.Thesecondapproachcomputesthebasebysummingthevalueaddedofeachindustrialsectorintheeconomy.ThebasehastobeadjustedforthefactthattheVATisadestinationtypetaxand,assuch,wouldtaximportsonentryintothecountryandzero-rateexports.Furtheradjustmentswouldhavetobemadeforchangesininventoriesandforcommoditieswhichareeitherzero-ratedorexempted.Makingtheseadjustmentsbysectorisusuallydifficultsincethevaluesofexportsandimportsarenotreadilyavailableonanindustrybasis.Althoughanaggregateadjustmentforthewholeeconomymaybepossible,detailedinformationbysectorwouldbelost.ThethirdapproachistoestimatethevalueofgoodsandservicespurchasedbyconsumerswhichwouldautomaticallycapturethedestinationprincipleoftheVATsinceitexcludesexportswhileimportsareincluded.TheVATbasebycommoditycanthenbecalculatedusingthecommoditysalesvaluesatthefinalconsumerlevel.TheapproachwouldalsofacilitateananalysisofincidenceorpriceimpactoftheVATonconsumers,issueswhichareusuallyimportantinthepoliticaldebateoversalestaxreform.Ⅲ.GENERALMETHODOLOGYFORESTIMATINGTHEVATBASEThissectionexploresthedetailedmethodologyofthethirdapproachdescribedabove.Thisapproachdependsheavilyuponinput-outputtables.Input-outputmodelsarestaticinnatureand,assuch,donotallowforbehavioralresponsestopolicychanges.Thus,theVATbaseestimationdiscussedinthispaperdoesnottakeintoaccountbehavioralresponsesduetothereplacementofthecurrentsalestaxsystemwiththeVAT.Aswasmentionedearlier,theVATbasecanbeestimatedusingthefinalexpendituresmadebyvariouseconomicentities.Constructionofthebasecan,therefore,beginwiththedatafordomesticexpenditurescontainedinthefinaldemandmatrixoftheI-Otables.Thefinaldemandmatrixgenerallycontainsatransactionmatrixofanumberofcommoditiesbyanumberoffinaldemandcategories.Thefinaldemandcategoriesmayincludemanycategoriesundereachoftheheadingssuchaspersonalconsumption,governmentexpenditures,investment,imports,andexports.Personalconsumptionreferstothoseindividuals/householdsorentitieswhoacquiregoodsandservicesfortheirownconsumptionandwhodonotproducesuppliesofacommercialnature.Governmentexpendituresincludethecurrentandcapitalspendingbyalllevelsofgovernment.ThiswouldbetreatedinafashionsimilartopersonalconsumptionunderaVATsystemexceptthattheVATpaidbythesamelevelofgovernmentsectorwillnotnecessarilyincreasenetgovernmentcollections.Investment,however,isexcludedfromthebasecalculationsincetheVATallowsforaninputtaxcreditforanybusinesspurchasesincludingcapitalinvestment.ExportsarealsoexcludedbecauseofthedestinationtypeVAT.Importsareignoredbecausepurchasesmadebyotherfinaldemandcategoriesareinclusiveofimports.ThestartingpointincalculatingtheVATbaseiswiththeamountofpersonalandgovernmentexpenditures.ThisamountisequivalenttothetotalexpendituresshownintheI-Otables.Adjustmentsmusthowever,bemadeforseveralfactorsinordertoarriveattheVATbase.Whatfollowsisadescriptionoftherelevantdeductionsandadjustments.CalculationofthecurrentsalestaxesSupposethatacountryhasamanufacturersalestaxsystemandthegovernmentproposestoreplaceitwithaVAT.ThegrossexpenditurescontainedintheI-Otables,expressedatpurchasers'price,includethecurrentsalestaxestobereplaced.Thesetaxesareimposedonthemanufacturer'ssalepriceofgoodsproducedinthecountryandonthedutypaidvalueofimportedgoods.Wholesaleandretailtrademarginsareexcludedfromthetaxbase.Usually,thesesalestaxesapplyalsotoarangeofintermediateinputsandcapitalgoodsusedintheproductionanddistributionofgoodsandservices.Inordertoremovethecurrentsalestaxespaiddirectlybypersonalandgovernmentsectorsfromeachcategoryofexpenditures,onehastofirstconstructthecurrentsalestaxbase.Thisisaccomplishedbyremovingtheretailandwholesaletrademarginsfrompurchasers'expendituresoneachgoodorservice,inclusiveofsalestax.Theexpectedcurrentsalestaxrevenuefromeachcommodity,say,theithcommodity(Ri),canbecalculatedbymultiplyingthederivedtaxbasebytheapplicabletaxrateandbythetaxableproportion:whereisthesalestax-inclusivebaseoftheithcommodity,isthetaxableproportionoftheithcommodity,andisthesalestaxrateoftheithcommodity.Themagnitudeofthetaxableproportionsdependsupontheproportionofthelegallytaxablesalestothetotalsalesoftheitemscontainedineachcommoditycategory.Afurthercalculationmustbemadeforthehidden(orindirect)salestaxesembeddedinpersonalandgovernmentexpenditures.Thisrepresentsthesalestaxeswhichareleviedonbusinessinputs.Theseinputsareusedinturntoproducegoodsandserviceswhichareultimatelysoldtofinalconsumersandgovernments.Ifsalestaxesareassumedtobefullyshiftedforward,thetaxeswillbetransformedintoahigherpriceofthefinalgoodsandservices.TheI-Otablescanbeusedtomeasuretheindirectsalestaxcontentinthegoodsandservicespurchasedbyfinalconsumersandgovernments.Thetotaloftheaboveexpecteddirectandindirectsalestaxrevenuesoverallcommoditiesandallentitiesusuallyisnotthesameastheactualtaxcollections.Thisisaresultofanumberoffactors,suchasbaddebtallowances,taxfreeallowancesforsmallimportation,taxevasion,smallsuppliersexemption.Afteradjustingforthefactorswhichareknown,theexpectedtaxrevenuesaremadeequaltotheactualtaxcollectionsbyapplyingacalculatedcompliancerate.Thisrateissimplytheratiooftheactualrevenuetotheexpectedrevenue.Ofcourse,thecomplianceratemayvarybycommodity,dependinguponmarketconditionsandotherfactors.Introductionofthevalue-addedtaxThepotentialrevenueoftheVATextendedtotheretaillevelcanbecalculatedbysummingdomesticpersonalandgovernmentexpendituresatretailprices.Thisdoesnotincludeexpendituresmadebybusinessessincethetaxespaidonbusinesspurchasesarecreditable.Thus,thestartingpointforcalculatingtheVATbaseiswiththevalueofallgoodsandservices(shownintheI-Otables)purchasedbypersonalandgovernmentsectors,netofallcurrentsalestaxes.Thisisthetotalpotentialtaxbase,whichisthenmultipliedbythetaxableproportionsforeachcorrespondingcommodityinordertoarriveattheVATbase.Atthispoint,thetaxableproportionsaredeterminedbythetaxpoliciesandlawsunderconsideration.Forexample,theproposedVATmayzero-rateorexemptcertaingoodsorservices.Insuchcases,thefullvalueofzero-ratedorexemptedgoodsandservicespurchasedbyindividualsorgovernmentshastoberemovedfromthepotentialbase.Forexemptitems,however,taxespaidonbusinessinputsusedtoproducetheexemptgoodsorservicesarenotcreditable.Therefore,anadditionaladjustmenttothetaxbaseisneededtoaccountfortheextenttowhichthevendorscannotclaiminputtaxcreditfortaxespaidonbusinessexpenditures.Insummary,thetotalpotentialVATbasecanbeexpressedasfollows:Whereisthepercentagewholesalemarginfortheithcommodity,isthepercentageretailmarginfortheithcommodity,isthetotalbusinessinputsusedintheproductionofthejthexemptsectorundertheproposedVAT,istheratiooftaxableinputstothetotalinputsusedintheproductionofthejthexemptsectorundertheproposedVAT,andBi,aiandpiaredefinedaseqn..Specialattentionshouldbepaidtolong-termresidentialrentpaidbytenantstolandlordsandimputedrentarisingfromtheconsumptionflowbyowner-occupiedhousing,whichisnormallypresentedaspartofpersonalexpendituresintheI-Otablesornationalaccounts.Thisrentisoftentaxexemptandshouldbeexcludedfromthetaxbaseinordertoavoiddoubletaxation,sinceasanalternative,theVATissometimesleviedonthepurchasepriceofnewlyconstructeddwellings.Aportionofgrosscashrentandimputedrent,however,wouldstillbesubjecttoVATasaresultoftaxableexpendituresmadeforrepairs,propertyinsurance,andcertainutilities.ItshouldbenotedthatthevalueoflandisexcludedinboththeI-Otablesandnationalaccountsbecauseitdoesnotrepresentvalueadded.Forourpurpose,thevalueoflandisusuallyincludedaspartofthepurchasepriceofanewhome.Thus,whennewhousesaretaxableundertheVAT,thepersonalexpendituresmustbeadjustedupwardtoaccountforthefullpriceofnewhomes.Someadjustmentsmustbealsomadetogrossexpendituresinthegovernmentsector.Forthemostpart,theproductionfromthissectorisusuallyexemptunderaVATandtheassociatedvalueaddedwouldnotattractthetax.Ontheotherhand,theintermediateinputsusedtoproducegovernmentgoodsandservicesareusuallytaxableand,asaconsequence,remaininthetaxbaseofthegovernmentsector.Finally,toarriveatabenchmarkestimateofrevenueyield,thetaxbaseforeachcommodityitemisthenmultipliedbythecomplianceratiounderthecurrentsalestaxsystem.ThisadjustmentimpliesthatthecompliancerateforeachcommodityundertheproposedVATwouldnotbedifferentfromthatbeingsubjecttothecurrentsystem.ThecomplianceratemaybeadjustedupwardhoweverifonebelievesthattheVATsystemwouldenhancetaxpayercompliance,orifthegovernmentcanincreasethelevelofadministrativeenforcement.Onthecontrary,thecomplianceratemaybeadjusteddownwardiftaxevasionisexpectedtospreadwiththeintroductionofaVAT.ThetotalexpectedVATrevenuesfortheeconomywillthenbeequaltothesummationofalladjustedtaxbasesacrossgoodsandservicespurchasedbyboththepersonalandgovernmentsectors,timestheproposedVATrates.AccrualversusactualrevenuecollectionsThemodeldevelopedsofarprovidesanannualestimateoftheVATpaidbyfinalconsumersandgovernments.TheseestimatesarepresentedonanaccrualbasisratherthantheactualrevenuesreceivedbythegovernmentduetothepaymentlagsbuiltintotheVATsystem.Forexample,theVATmaybedesignedtoprovideagreatdealofflexibilityinfilingrequirements,dependingonthesizeofthebusiness.Forlargefirms,filingmayberequiredonamonthlybasis.Forsmallerfirms,filingmaybeallowedonaquarterlyorannualreturn.Certaintypesofbusinessessuchasexportersarelikelytochoosetofiletheirreturnsonamonthlybasisinordertoclaiminputtaxcreditsearlier.Furthermore,alltaxpayersarelikelytohaveuntiltheendofthemonthfollowingthereportingperiodtofiletheirreturns.Fromagovernment’sperspective,itisnecessarytotransformtheVATestimatesfromanaccrualtoacollectionbasis.OnecanfirstsegregatetheaboveannualestimateoftheVATbaseintotheindividual``value-added''componentsforprimaryproducers,manufacturers,wholesalers,retailers,andotherservicesectors.Eachofthesecomponentsisthenconvertedtoamonthlybasisusingsalesandotherrelevantdata.Forexample,theretailcomponentisdistributedtoeachmonthbasedonmonthlyretailsalesdata.Thisshouldreflecttheseasonalpatternsinproductionanddistributionchannels.Theappropriatecollectionlagsshouldalsobeincorporatedforeachtypeoftaxfiler.Theresultingrevenuescanthenbetransformedtoacollectionbasis.ThisconsiderationwillbeparticularlyimportantwhentheVATisfirstintroducedintoacountry.Ⅳ.ANAPPLICATIONTOACASEFORNEPALThecurrentsalestaxcollectedinNepalinfiscalyear1994-95wasabout6,032millionrupeeswhichaccountsforapproximatelyone-thirdofthetotaltaxrevenues.Itisthesinglemostimportantrevenuesource.Likemanyothercountries,thesalestaxisimposedonthemanufacturer'ssalepriceofgoodsproducedfordomesticconsumption,andonthedutypaidvalueofimportedgoods.Asaresult,thetaxappliestoarangeofinter-mediateinputsandcapitalgoodsusedintheproductionanddistributionchannels.Thistaxhasbecomenotonlyadministrativelycomplex,butalsoeconomicallyinefficient.TheMinisterofStateforFinanceinNepalannouncedintheJuly1993budgetthatthegovernmentwouldfocusongraduallytransformingthesalestaxintoavalue-addedtax.Sincethen,subsequentgovernmentshavehadtomakeaseriesoftaxpoliciesandsettaxratesinordertoensurethenewsalestaxsystemisfair,simple,efficientandproducesrevenueinastablefashion.IntheJuly1993budget,itwasannouncedthatthenumberofsalestaxrateswouldbereducedfromfivetotworates,10%and20%.Thesametaxratesareappliedequallytodomesticallyproducedgoodsandtoimportsinordertostreamlinethesalestaxoperation.Inaddition,therehasbeenasubstantialamountofgovernmentrevenuescollectedfromanumberofselectiveexcisesoncigarettes,liquor,beer,softdrinks,edibleoils,cementandsoon.ThemainobjectiveofthissectionistoapplytheabovemodeltotheestimationofpotentialrevenuesforaVATtobeimplementedinNepal.PreparationofthebasicdataThedataarequitelimitedinNepal.Inordertopresentthemostup-to-dateeconomicstructureforthecountry,wedevelopedacompletesetofdatafortheFY1994-95sincethisisthelatestyearthatdataareavailableontheexpendituresidefromnationalaccountsinNepal.Thedataarearrangedintothreemajorcategories-personal,business,andgovernment.First,thedetailedpersonalexpendituredataareonlyavailablefromaHouseholdBudgetSurveyfor1985.Thesedataalsoareseparatedintourbanandruralforeachclassofcommodityexpenditure.Duetotheirdifferentexpenditurepatternsandtherecentmassivemigrationfromruraltourbanareas,thecurrentdetailedhouseholdexpendituresbycommoditiesforthecountryasawholeareconstructedbyincreasingtheproportionofthetotalnationalhouseholdexpendituresmadeinurbanareasfrom7%in1985to12%in1994.UsingtheFY1994-95aggregateprivateconsumptionshowninnationalaccountsasacontroltotal,thedetailedpersonalexpendituresbycommoditiesareestimated.Second,theinformationconcerningbusinessexpendituresoncapitalinvestmentandintermediateinputsisverylimited.Thenationalaccountsonlyprovideanaggregatefigureonprivatecapitalformationwhichcanbefurtherseparatedintomachineryandequipmentandconstruction.Usingimportinformation,thetotalsformachineryandequipmentarefurtherallocatedamongtractors,motorvehiclesandparts,aircraft,telecommunications,medicalequipment,andothermachineryequipment.Thisisdoneinanticipationthatcertaingoodsorsectorsarelikelytobeeitherzero-ratedorexemptedundertheproposedVAT.Thesplitbetweenresidentialandnonresidentialconstructionisalsoimportantbecauseoftheirdifferencesinthecompositionofmixedconstructionmaterials.Fornonresidentialconstruction,aboutone-thirdissponsoredbyinternationalorganizationsandisclassifiedasexpendituresofthegovernmentsector.Foreachconstructioncategory,detailedrequirementsofconstructionmaterials,laborcost,aswellasprofitsandcontracttaxareprovidedbytheNepalEngineers'Association.Inaddition,thedetailedintermediateinputsdemandedbyeachoftheindustrialsectorsaredevelopedusingthe1987I-Otables.Third,governmentexpendituresareseparatedintoRegularandDevelopmentExpenditures.ThelatteraremostlyfundedbyinternationalorganizationssuchastheWorldBank,theAsianDevelopmentBank,andbilateraldonorswhichdonotpaytariffsorothercommoditytaxesontheirpurchases.EachoftheRegularandDevelopmentExpenditurescanbefurtherbrokendownintocurrentandcapitalexpendituresbycommodityitemsoreconomicfunctions.AfterthebasicdetailedexpendituresdataforFY1994-95areconstructed,thewholesaleandretailmarginsforeachcommodityareremovedfrompurchasers'expendituresoneachgoodorservicederivedabove.Thiswouldformthemanufacturers'orimporters'salestotals,inclusiveoftaxes,bycommodityandbyentity.Theexpectedsalestaxrevenueforeachcommoditycanthenbecalculatedbasedoneqn(1).SimulationoftheVATrevenuesTheproposedVATwillbeimposedongoodsandservicesconsumedintheKingdomofNepalexceptforthosespecifiedinSchedules1and2oftheVATAct.TheVATActwillreplacetheSalesTaxAct,HotelAct,ContractTaxAct,andEntertainmentAct.Thisimpliesthat,forrevenue-neutral,atleastatotalof6,857millionrupeesshouldhavebeengeneratedinFY1994-95iftheproposedVATwasimplemented.Thefollowingbasictaxpoliciesareincorporatedinthemodelsimulationsforillustrativepurposes:(ⅰ)imposeasinglerateofVATwhichisextendedtotheretaillevelunderthedestinationprinciple.Mostpersonalandgovernmentexpendituresaretaxed,includinggovernmentexpendituresfinancedthroughinternationalorganizations.(ⅱ)zero-rateexportedgoodsandservices.(ⅲ)exemptunprocessedfood,drugandmedicalservices,booksandnewspapers,waterandtransportationservices.(ⅳ)exemptnewlyconstructeddwellings,residentialrents,andfinancialservices.(ⅴ)adjusttheexciseleviesonalcoholicbeveragesandtobaccoproductstomaintaintheircurrentconsumerprices.Beforeturningtotheempiricalresults,itisusefultorecalltheequivalencyoftheVATtothatofretailsalestaxleviedonthefinalsellingpriceofallgoodsandservices.Thedataonthelatterwerederivedearlierintheformofgrossexpendituresbycommoditiesunderthepersonal,business,andgovernmentcategory.Thesegrossexpendituresrepresentthesumofalltheexpendituresonthevariouscommoditiesandprimaryinputscontainedineachcategory.Adjustmentsmustbemadeforfactorssuchasremovalofthecurrentsalestaxes,zero-ratedandexemptgoodsandservices,andrealistictaxcompliancebytaxpayersinordertoarriveattheVATbaseandtheassociatedrevenues.First,theabovegrossexpendituresbycommoditiesandbyentitiescontaintheamountsofthecurrentsalestaxes,directlypaidbyindividualsandbygovernments,whichmustbedeductedincalculatingtheVATbase.Sincesalestaxesareassumedtobefullyshiftedforwardtofinalconsumers,afurtherdeductionmustbemadefortheindirectsalestaxesembeddedinthepriceofpersonalandgovernmentexpenditures.OnecanobservefromColumns(2)and(3)ofTable1thatmorethanhalfofthecurrentsalestaxesareimposedonintermediateinputsandcapitalgoodsinNepal.Theseinputtaxesarenowembodiedintheformofhigherpricesofgoodsandservicessoldtofinalconsumersandgovernments.Second,theexcisetaxonalcoholicbeveragesandtobaccoproductsareadjustedupwardinordertomaintainthesamelevelofretailpricesforconsumers.Theexciseadjustment(DE)mustequalthedifferencebetweenthemanufacturers’salespricesoftheexcisablegoodunderthenewversusthecurrentsalestaxsystems.Thatis:whereisthesingleVATrate,istheVATcompliancerate,isthecurrentsalestaxrateoftheithexcisablegood,andisthecompliancerateofthecurrentsalestaxsystems.isdefinedaseqn.(1),namely,thecurrentsalestax-inclusivebaseoftheithexcisablegood.Hence,theadjustmentsshowninColumn(5)ofTable1refertothecase