Botswana's Rising VAT Gap Exposes Compliance Crisis, IMF Calls for Smarter Tax Enforcement

An IMF study finds that Botswana's rising VAT revenue losses are driven mainly by worsening taxpayer non-compliance rather than flaws in tax policy, with the VAT gap increasing from 4.9% of GDP in 2017 to 5.8% in 2024. The report urges stronger tax administration, data-driven enforcement, and improved institutional capacity to boost domestic revenue without increasing tax rates.

Botswana is losing billions in potential tax revenue not because its tax laws are weak, but because too much Value-Added Tax (VAT) is going unreported. That is the central finding of a new technical assistance report by the International Monetary Fund (IMF), which warns that rising taxpayer non-compliance is steadily widening the country's VAT gap despite stable tax collections. Conducted by the IMF's Fiscal Affairs Department in collaboration with the Botswana Unified Revenue Service (BURS), the Ministry of Finance and Economic Development (MFED), and Statistics Botswana, the study analysed VAT performance between 2017 and 2024 using the Revenue Administration Gap Analysis (RA-GAP) model. Its findings offer an important roadmap for policymakers, development partners and private businesses seeking to strengthen domestic revenue mobilisation without raising tax rates.

Stable Tax Revenue Hides a Growing Problem

On the surface, Botswana's VAT system appears to be performing well. VAT revenue remained broadly stable at 3.0 to 4.2 percent of GDP throughout 2017-2024, even after the economy was hit by the COVID-19 pandemic and a temporary reduction in the VAT rate from 14 percent to 12 percent between August 2022 and March 2023. By 2024, VAT collections had recovered to around 4.2 percent of GDP, returning to pre-pandemic levels.

However, the report shows that these stable revenues conceal a worsening compliance problem. Botswana's total VAT gap, the difference between the tax that should have been collected and what actually reached government coffers, rose from 4.9 percent of GDP in 2017 to 5.8 percent in 2024. The main driver was the compliance gap, which increased from 2.0 percent of GDP to 3.5 percent over the same period. In practical terms, the share of potential VAT revenue lost due to taxpayer noncompliance increased from 36.5 percent to 47.7 percent. Meanwhile, the policy gap, which reflects revenue losses resulting from exemptions and VAT policy design, remained relatively stable at around 3 percent of GDP, falling to 2.3 percent in 2024. This indicates that Botswana's tax laws are not the primary problem; tax administration is.

Smarter Tax Administration Could Deliver Higher Revenue

For policymakers, the report sends a clear message: improving compliance will generate greater returns than introducing new taxes or changing VAT policy.

One of the study's most important findings is that more than 90 percent of the compliance gap during 2017-2024 came from the assessment gap. This means businesses either failed to declare their tax liabilities or significantly under-reported them before tax assessments were completed. Only a relatively small share of lost revenue resulted from unpaid taxes that had already been assessed.

The report therefore recommends shifting resources towards identifying non-filers, improving taxpayer verification, strengthening audits and using data-driven compliance risk management. Instead of focusing mainly on recovering tax arrears, revenue authorities are encouraged to prevent revenue losses before they occur. This approach could significantly improve government revenue while avoiding additional tax burdens on compliant businesses and households.

The report also identifies where these efforts should be concentrated. The trade and transportation sector, together with mining and manufacturing, accounts for the largest share of unpaid VAT due to complex supply chains, high transaction volumes, and informal business activity. In contrast, sectors such as financial services and construction recorded much smaller compliance gaps. This suggests that targeted audits and sector-specific enforcement would be more effective than broad compliance campaigns covering the entire economy.

Development Partners Have a Bigger Role to Play

The report presents a strong case for development partners to invest in institutional capacity rather than short-term technical assistance alone. It recommends establishing a dedicated VAT gap analysis unit within BURS, supported by continuous staff training in RA-GAP methodologies, revenue analytics and compliance risk management.

Improving data quality is identified as another priority. Better integration of tax administration records with national statistical data, stronger governance of administrative information and closer collaboration between BURS and Statistics Botswana would improve the accuracy of VAT gap estimates and allow authorities to detect compliance risks earlier.

For international financial institutions and development agencies supporting domestic resource mobilisation across Africa, Botswana's experience demonstrates that modern tax administration depends increasingly on digital systems, quality data and advanced analytics rather than policy reforms alone. Supporting these institutional improvements could help governments generate additional domestic revenue while reducing dependence on external financing.

Greater Certainty for Businesses, Stronger Finances for Government

The report also has important implications for the private sector. Businesses operating in sectors with strong compliance records could benefit from more targeted enforcement, as tax authorities would increasingly focus audits on high-risk industries rather than applying blanket compliance measures. Improved data systems and risk-based administration could also reduce unnecessary inspections, improve transparency and create a more predictable tax environment for compliant firms.

For governments, the report recommends making VAT gap estimation a permanent part of revenue administration rather than an occasional exercise. Regular assessments would allow policymakers to monitor trends, evaluate reforms and identify emerging risks before they become major fiscal challenges. Integrating VAT gap analysis into compliance risk management would also help authorities prioritise audits, strengthen taxpayer profiling and design more effective enforcement strategies.

Ultimately, the report concludes that Botswana's greatest opportunity to increase revenue lies not in changing tax policy but in improving tax compliance. By investing in stronger analytical capacity, better-quality data, targeted enforcement and modern compliance systems, the country can reduce revenue losses, strengthen fiscal sustainability and create a fairer tax environment. The findings also offer a practical blueprint for other developing economies seeking to expand domestic revenue without increasing tax rates, making the report relevant well beyond Botswana's borders.