Unlocking VAT’s Potential: Its Role, Challenges and Policy Responses

The VAT has been adopted by over 170 countries for its ability to raise substantial revenue with limited economic distortion, making it a cornerstone of modern tax reform. Yet VAT systems continue to face challenges, including base erosion from exemptions and reduced rates, administrative pressures around refunds, and rising complexity from digitalization and cross-border trade. The authors, in this article, examine VAT’s role relative to other taxes, key design features shaping its performance and the main constraints on its effectiveness. Using case studies from Uzbekistan, Mozambique and Latin America, they propose policy insights to strengthen VAT’s contribution to equitable and resilient revenue systems.