This paper discusses methodologies related to three approaches to the estimation of revenue from the VAT system in Bangladesh. Starting from a heuristic approach, the authors used static Input-Output and a Computable General Equilibrium (CGE) model to determine the revenue effects of alternative VAT rates. The major conclusion is that, the VAT at the rate of 12 percent would be broadly revenue neutral and at 15 percent it would be moderately revenue augmenting.

Comparison of alternative approaches indicates the superiority of CGE presentation, which projects a better disaggregated view from budgetary and accounting point of view, and a somewhat less bouyant revenue projection compared with the other two approaches. Secondary effects resulting from the response of producers and consumers to changes in the tax regime and the VAT rate and corresponding changes in relative prices, allows for a more realistic revenue estimation under the CGE approach. The paper also indicates that, by eliminating exemptions, multiplicity of tax rates and cascading effects, and by allowing for broadening of the tax base and cross checking, the VAT system, if administered properly, should lead to a much higher revenue projection than envisaged in this study based on static models.