Should We Consider a Post-Covid-19 Reform of the VAT In Cameroon?

FISCAL POLICY LETTER  No4: Should We Consider A Post-Covid-19 Reform Of The VAT In Cameroon?

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Foreword

The COVID-19 pandemic so far has had a profound impact on the global economy. The containment measures adopted by governments to curb the spread of the disease have curtailed business activities, making it impossible for companies to adequately meet their tax obligations. As a result, forecasts for customs revenues and internal tax resources have been revised downward, mainly due to the closure of borders. Collected both at the borders and within the country, Value Added Taxes revenues have naturally been very negatively affected by the crisis.

In Cameroon, losses related to value added tax in 2020 were estimated at CFAF 298.017 billion, representing 50.73 percent of recorded tax losses, which is hardly surprising. Value-added taxes are identified as the main source of tax revenue in Cameroon. They were estimated at 44.73% of tax revenue in 2019 and about 7% more than in 2016. The importance of VAT in tax revenue mobilization requires an examination of the Cameroonian tax system, particularly the factors that could explain a reform of the tax. Moreover, given that Cameroon is at high risk of external debt distress (IMF, 2018), there is an urgent need to find new ways to ensure the continued sustainability of public finances.

This Tax Policy Letter analyzes the rationale for VAT reform in Cameroon. First, we present the severity of the economic repercussions of the coronavirus health crisis at the level of VAT revenues in Cameroon. Noting that VAT is the main source of indirect tax revenue – 60.19% in 2019 compared to 54.54% in 2016, for example – we then examine the guiding principles that govern its collection and application in Cameroon. A careful examination of these principles has allowed us to analyze the benefits associated with a reform of this tax on final consumption.

Assuming finally that a reform of the VAT is a significant option in Cameroon today, such an initiative would mainly consist of broadening the tax base while guaranteeing better competitiveness of domestic firms and an improvement in the purchasing power of households. In other words, a reform of the VAT to strengthen competition between domestic firms and foreign firms would make it possible to reduce the VAT on local goods and increase the VAT on imported products. Thus, an increase in VAT on foreign goods would force many local consumers to switch to locally produced goods. As a result, Cameroonian companies based abroad may be forced to relocate, which would help create jobs and support economic growth in line with the objectives set out in the National Development Strategy 2020-2030 (NDS30)..