Supporting the Policy Enabling Environment for Development

Economic Costs of VAT Refund Delays in Mozambique

Over the past decade, the Government of Mozambique has implemented a comprehensive tax reform program covering income taxes, indirect taxes, and customs duties. Major changes have been introduced in both tax policy and tax administration. As a result, the IMF now regards Mozambique’s tax system as being “broadly in line with international best practices,” particularly in the areas of consumption and income taxation.

The introduction of the Value Added Tax (VAT) in 1999 was a centerpiece of the program. However, the VAT system has generated strong complaints from the business community about delays in the administration of VAT refunds. Alarm bells about this issue have rung repeatedly in major reports on the business environment in Mozambique. The reports have also offered numerous recommendations to improve the administration of VAT refunds, drawing on international best practices for developing countries like Mozambique.

The purpose of this note is to examine the economic effects of delays in the payment of VAT refunds in Mozambique. The next section briefly explains the nature of VAT refunds and the factors causing delays. Section 3 presents the economic analysis. Section 4 then discusses a range of remedies, and section 5 ends with a summary of the main points and priority recommendations.

The basic conclusion is that alarm bells should continue to ring. There is indeed a serious problem with refund delays in the VAT system. The economic costs are substantial. And practical reforms are available to achieve a better balance between revenue protection and private sector development.

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