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How to Design a Presumptive Income Tax for Micro and Small Enterprises

Jean-Francois Wen

No 2023/002, IMF Fiscal Affairs Department from International Monetary Fund

Abstract: Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income. Such simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes. The note addresses design issues for a turnover tax regime—which taxes it replaces, what the criteria are for eligibility, how to determine the optimal threshold, and how to set the tax rate. A key observation is that, although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities. A table of tax rates and turnover thresholds observed internationally is provided. The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.

Keywords: Presumptive tax; turnover tax; informal sector; microenterprises; taxpayer Compliance cost; turnover tax rate; turnover tax systems; IMF library; Sales tax; Income and capital gains taxes; Income tax systems; Corporate income tax; Effective tax rate; Africa; South America; Eastern Europe; West Africa; Western Europe (search for similar items in EconPapers)
Pages: 26
Date: 2023-06-29
New Economics Papers: this item is included in nep-acc, nep-ent, nep-iue, nep-pbe and nep-pub
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