A progressive VAT regime via real-time adjustments to rates based on individuals’ economic position
Uruguay is proposing to be one of the first countries (Uzbekistan was the pioneer with app-based VAT refunds in 2024) to roll out live VAT rate adjustments for its population based on wealth and household expenditure. The aim is the tackle one of the principle criticism of VAT – that it is a regressive tax, charging the same amount of tax on all individuals irrespective of income.
In a recent radio interview, the in-coming Finance Minister, Gabriel Oddone, explained that plans are being worked on to live flex rates to relative wealth and said “we have enough information to establish differential rates for people instead of products.” The project is being developed with the Inter American Development Bank. This provides financial and technical support to Latin American national and sub-national governments.
Tech practicalities aside, the presents a huge social policy opportunity, but also potentially flipping fundamental structure of VAT. This would be sysmic change to ‘cure’ the perceived regressivity of VAT via the expenditure end of the regime.
Digital Tuapp Cards to live calculate rates
The proposal builds on the Ministry of Social Development (MIDES) digital tools and wallet (‘Mides’ or ‘tuapp’ cards). This provides monetary credits distribute subsidies to people in need. The cards were used extensively during COVID. These would support in-person or online payments to help adjust the VAT rate and amount being charged at checkout to the consumer.
These cards could be used online or in shops via registered fiscal cash registers or online marketplace checkouts to receive certificated VAT calculation on the transaction. This provides a cash discount on the amount due by the consumer – so ensuring the discount is genuinely passed onto the them and not held back by the retailer (a common failing of traditional reduced VAT rate discounts).
The calculation is then retained in digital record of the retailer and General Taxation Directorate tax authorities to ensure full audibility.
Existing global schemes compensation – Uzbekistan a pioneer
Such digital identification tokens have been suggested several times in academic studies. It’s worth reading Rita de la Feria and Artur Swistak’s excellent paper on progressive VAT reform for examples and ideas.
But due to lack of technology infrastructure have not taken off. India had proposed it for its 2017 launch of a single Goods and Services Tax. But instead opted for direct bank payments. Other countries have experimented with post-transaction electronic compensation like the tuapp card, notably Columbia.
Since May 2024, Uzbekistan citizens on the social register can receive a VAT refund (12%) when buying meat, eggs and butter. In order to return VAT, the consumer must download a mobile application, register using Face ID and scan the QR code of the purchase receipt in the application. This routine has the added advantage for encouraging expenditure away from underground economy which is unable to offer the cash discount.
Policy challenge – how pay for fairness?
Aside from the IT technical challenges, the political policy challenge will be fairness. Presumably any cuts will have to be met with compensatory rises for other individuals. Or, is this elusive opportunity for tax authorities to withdraw the ‘tax breaks’ afforded to the better off by reduced VAT rates for all on essentials such as food, power, medicine and so much more?
