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SIVAR: Simulator to assess VAT and its reforms

SIVAR is an open-access VAT and its reforms simulator based on public information, that replicates fundamental features of the tax legislation and provides results and VAT metrics in regards to the collection, tax evasion, impact of the household basic food basket, tax productivity and progressivity, tax base coverage and incidence according to household gender prevalence.
 

The tool contributes to the discussion and analysis of the structure of the VAT, its reforms, and its financial implications, right after the tax reform bill was withdrawn from Congress.
 

The VAT and income tax are fiscal pillars in Colombian taxation 1. In 2020, VAT contributed 41% of the collection of national taxes. This tax is the second-most important tax in the Colombian taxation system, not far from income tax. The changes proposed in the VAT are very socially sensible, as opposed to income tax, it impacts approximately 10% of the adult population, as it taxes all consumers.
 

Apart from exports, public administration, non-market services –goods and services provided freely or at economically insignificant prices– by the government and financial institutions, the VAT has the potential to collect Col $6.8bn annually for every point of the rate (2020 figures.) This makes it very attractive for financing a good part of the public expense. However, this potential is undermined by evasion and special treatments (exemptions, exclusions, and reduced rates).
 

Read more: States assets and their relationship with the tax reform (in Spanish)
 

A reasonable policy to increase VAT productivity is to fight evasion but increasing collection reducing special treatments should be analyzed with greater detail particularly for its distributive effects.
 

The nature of the VAT is regressive, on one hand, it does not consider the contributive capability of those who pay the tax, and on the other, tax consumption, whose relative weight is greater in low-income households, while this proportion decreases with greater income levels.
 

These features lead tax policymakers to introduce special treatments, applied mostly on high consumption products among low-income families to effectively reduce VAT regressivity.


However, special treatments also bring undesired effects, including distortions that alter the efficient allotment of resources, complexities in the taxing design which increases administrations costs and the costs of complying with tax obligations, that are optimal opportunities for tax evasion and evasion, benefits for high-income consumers that do not require special treatment and less income for the treasury department.


As usually happens in matters of public policy, sometimes there is opposition between efficiency and equality, and VAT reform does not escape from these tensions. For this reason, the proposed modifications require ample, comprehensive, democratic, and well-informed technical discussions. This is why the CID accepted and supported this initiative to create the SIVAR.
 

Read more:  Fiscal reform, a direct hit to salaried workers
 

SIVAR structure and results


The simulator is supported by public information from the Colombian Administrative Department of Statistics (DANE, for its Spanish acronym) and the National Tax and Customs Administration (DIAN, for its Spanish acronym). It also takes into account regulations from the Colombian Tax Statute and its regulatory provisions.


With this tool they can obtain results for the current legislation as with possible future VAT reforms, which include 2:

  • Review of the main effects caused by a VAT reform,
  • Potential VAT collection and projections for 4 years,
  • Estimated tax evasion rate,
  • Impact of the VAT on the Consumer price index for different income groups (impoverished, vulnerable, middle class, high-income, average household basket),
  • Impact on the total expense of households categorized by income deciles,
  • VAT progressivity/regressivity del IVA categorized by income deciles,
  • Amount per household and at the national level of VAT compensation for vulnerable families, and distributive incidence of the VAT (Gini index.)


Access the SIVAR here
 

Finally, SIVAR is a useful tool for those interested in knowing the current features of the VAT in Colombia, simulating the effects produced by the structural changes of the tax, or exploring the implications of their reform proposals.
 

 


1 En 1970 generaron en conjunto el 74 % del recaudo nacional y su participación relativa se elevó durante las tres últimas décadas hasta alcanzar un 90 % en 2020. SIVAR - Simulador para la evaluación del impuesto al valor agregado y sus reformas en Colombia. Javier Ávila-Mahecha. Profesor Escuela de Economía, Universidad Nacional de Colombia. Facultad de Ciencias Económicas, Centro de Investigaciones para el Desarrollo – CID Sede Bogotá. http://www.fce.unal.edu.co/media/files/CentroEditorial/documentos/investigacionesCID/documentos-CID-39.pdf

2 Página 12. SIVAR - Simulador para la evaluación del impuesto al valor agregado y sus reformas en Colombia.

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