Estimating VAT Policy and Compliance Gap across the Iran’s Provinces

Abstract This paper aims to propose a method for measuring the value added tax gap decomposed into two main components: compliance and policy gaps. By definition, policy gap is the difference between the potential tax revenue and what can be collected according to tax code. In comparison, the compliance gap is defined as the difference between full compliance with tax code and the actual compliance. Compliance gap covers revenue losses stems from tax evasion and tax fraud. In order to assess the tax gap at the provincial level of the country, it is vital to find a way to verify inter-regional and inter-sectoral flows of trade and account for exemptions, credits and thresholds according to VAT tax code. To do this, we employed a top-down method that uses the production data and also regional input-output tables which calculated specifically for this paper. The results indicate that the policy and compliance gaps in the 31 provinces of the country are in average 35.2% and 33.7% respectively. That is, only 31 Rials were collected from every 100 Rials that can be collected in the ideal VAT model in which production efficiency satisfies.