Navigating the Challenges: Wages and Reforms in Madagascar's Economy. Part Eighteen- VAT Reform

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Madagascar’s Value Added Tax (VAT), or Taxe sur la Valeur Ajoutée (TVA), currently operates at a 20% standard rate. It is a cornerstone of the national budget, designed to capture consumption across the economy. While the rate is competitive within the African context, the system faces significant structural hurdles. Tax authorities are currently pivoting toward digital modernisation —specifically mandatory electronic invoicing—to combat revenue leakage. However, the system remains burdened by a high compliance threshold for small businesses, inconsistent VAT credit refund mechanisms, and a proliferation of exemptions that complicate tax administration and erode the revenue base.

Here are some policy recommendations 

Rationalize VAT Exemptions

Madagascar’s current tax code is cluttered with a wide array of VAT exemptions that were likely intended to support specific sectors but have ultimately weakened revenue collection. These exemptions create a "leaky" system that is difficult for authorities to monitor and prone to misuse. By narrowing the scope of these exemptions, the government could create a more neutral and predictable tax environment, which is a fundamental step toward strengthening the domestic revenue base needed to fund essential public services like education and healthcare.

Optimize the Registration Threshold

The current VAT registration threshold is relatively low, which forces a large number of small, low-yield businesses to navigate a complex compliance system that consumes time and resources they can ill afford. From a policy perspective, raising this threshold would allow the Direction Générale des Impôts (DGI) to shift its focus away from small-scale administration and toward the larger, high-yield taxpayers who represent the bulk of potential revenue. This shift would simultaneously reduce the administrative burden on small entrepreneurs, potentially encouraging more formal business activity.

Institutionalize VAT Refunds

One of the most significant "hidden taxes" on the private sector is the inefficient and often unpredictable process for claiming VAT credit refunds. When businesses are unable to recover the VAT they have paid on inputs, it creates severe cash-flow constraints that discourage investment and growth. Establishing a transparent, perhaps even automated, refund mechanism is critical. If the state can guarantee timely refunds, it would improve business liquidity and foster a much-needed culture of trust between the private sector and tax authorities.

Accelerate Digital Integration

The transition toward mandatory electronic invoicing is a major leap forward for Madagascar’s tax administration. Global evidence consistently shows that digital traceability is the most effective tool for curbing tax evasion and identifying revenue leakage in real-time. Beyond just enforcement, this digital shift allows for the "pre-filling" of tax returns, which drastically lowers the compliance cost for businesses. For a country looking to modernize its economy, embracing these digital systems is not just an option—it is a necessity for long-term fiscal stability.

Broaden Base via Digital Services

As the global economy moves increasingly online, Madagascar has taken a smart step by extending VAT to non-resident digital service providers. This ensures that foreign companies profiting from the Malagasy market contribute their fair share to the national budget, preventing a competitive disadvantage for local firms. By formalizing the taxation of these digital flows, the government is capturing revenue from the modern economy that would have otherwise remained untaxed, helping to close the gap in the national budget.