VAT Tax Expenditure and Compliance Gap in Iran: A Regional Analysis over 1388-1394

Since its inception at the mid- 1387, Value added tax has performed as a growing and stable source of revenue for government. Nonetheless, the size of missing VAT income because of non-compliance with law (compliance gap) as well as ignoring income to achieve distributional targets or to facilitate implementation (policy gap) is a question. In other word, in this paper we are going to give an estimate of VAT gap and understand its evolution over time. To estimate VAT gap, in this paper we employ a macro economic approach rather than micro economic approach. Macro economic approach could be base on production or consumption. Production method which is adopted in this paper is based on input - output table. Relying on input - output table, the value of sales and buys can be estimated and according to definition by subtracting latter from former the value added can be computed. Based on computed value added and imposing standard tax rates and actual policy rates, potential and legal tax revenue can be computed. The difference between potential and legal tax revenue is called policy gap and if government's actual tax revenue become substracted from legal tax revenue, the result will be compliance gap. In this paper, we estimated 31 regional input-output tables during 1388-1394 and computed the VAT gap. Results indicate a volatile but decreasing VAT gap, so as compliance gap has decreased from 68% to 59.6% and policy gap from 40.2% to 31%. Furthermore, Tehran, Khorasan-e Razavi, Bushehr, Fars, Isfahan and Azarbaijan-e Sharghi are provinces with highest share of complia