Can Asia-Pacific Close Its Tax Gap? IMF Outlines Reforms to Boost Revenue and Protect Families

An IMF study warns that Asia-Pacific economies face major tax revenue shortfalls, highlighting the need for VAT reforms, fewer corporate tax exemptions and stronger property taxation to finance development. The report urges governments to modernise tax administration, improve compliance and build public trust while protecting consumers, supporting businesses and encouraging sustainable economic growth.

The International Monetary Fund (IMF), drawing on research and evidence from the Organisation for Economic Co-operation and Development (OECD), Asian Development Bank (ADB), World Bank and International Labour Organization (ILO), has warned that Asia-Pacific economies need stronger tax systems to finance development and respond to growing economic pressures. In its October 2026 working paper, Priorities for Tax System Reform in Asia and the Pacific, IMF researchers Ikuo Saito, Jimena Acedo, Ruud De Mooij, Chenghong Wang and Ross Warwick identify major weaknesses in tax collection, corporate incentives, property taxation and revenue administration. The study highlights how ageing populations, climate change, artificial intelligence and global economic uncertainty are increasing pressure on government budgets.

The findings suggest many countries struggle to collect enough revenue to support essential public services. In 2024, tax revenue as a share of GDP was 2.7 percentage points lower in advanced Asia-Pacific economies than in comparable countries elsewhere. The gap reached 3 percentage points in emerging economies and 1.3 percentage points in low-income economies. Sixteen economies collected less than 15 percent of GDP in taxes, including three collecting below 10 percent. The IMF estimates that 19 economies could potentially mobilise additional revenue exceeding 3 percent of GDP on average by improving their tax systems.

Asia-Pacific's Tax Revenue Gap Threatens Development Spending

Low tax collection affects economic growth, public services, and household welfare. Governments with limited revenue struggle to invest in roads, electricity, healthcare, education and social protection. These weaknesses can increase business costs, discourage private investment and reduce opportunities for employment.

For traders and small businesses, inadequate infrastructure means higher transport expenses, unreliable services and weaker market connections. Consumers face the consequences through expensive goods, limited public services and reduced economic opportunities.

The IMF argues that governments should focus on collecting taxes more efficiently rather than relying exclusively on higher rates. Broadening the tax base, reducing unnecessary exemptions and improving compliance could generate revenue while limiting additional pressure on businesses and households.

VAT Reforms Could Unlock Billions but Raise Consumer Concerns

Value-added tax (VAT) is identified as one of the region's largest opportunities for increasing government revenue. By 2025, only 24 of 33 Asia-Pacific economies had adopted VAT or similar consumption taxes, representing 73 percent compared with 88 percent globally.

The region's average standard VAT rate stood at 12.3 percent, significantly below the 16.7 percent average elsewhere. Advanced regional economies collected VAT revenue equivalent to 4.5 percent of GDP, compared with 7.5 percent internationally. Emerging economies collected 4.2 percent against 6.5 percent, while low-income economies collected 3.8 percent against 4.4 percent.

The IMF estimates that raising VAT rates towards international benchmarks could theoretically generate additional revenue equivalent to 3.5 percent of GDP in advanced economies, 2.6 percent in emerging economies and 2.2 percent in low-income economies.

However, higher consumption taxes could increase prices and disproportionately affect poorer households. Policymakers must therefore balance revenue needs with affordability by improving tax compliance, reviewing exemptions and providing targeted financial assistance.

Corporate Tax Breaks and Property Taxes Need Urgent Attention

Corporate tax incentives are another major source of potential revenue losses. Across 13 Asia-Pacific economies examined, governments offered an average of 31 corporate tax incentives, compared with 20 elsewhere.

These incentives, including tax holidays, exemptions and reduced rates, are designed to attract investment. However, the IMF warns that their economic benefits are often uncertain, while they can reduce government revenue and create unfair advantages between businesses.

The study recommends transparent, time-limited incentives linked to actual investment spending.

Property taxation also remains underdeveloped. Advanced economies collect approximately 1 percent of GDP through recurrent property taxes, while emerging and low-income economies collect substantially less.

The IMF suggests that emerging economies could work towards collecting at least 0.5 percent of GDP through property taxation. Bhutan provides an example of reform, with collections increasing from approximately 55 million to 600 million ngultrum following changes introduced in 2023.

Better property records, updated valuations and digital systems could help governments generate revenue for urban infrastructure and local services.

Digital Tax Systems and Public Trust Hold the Key to Reform

Weak tax administration continues to undermine revenue collection. VAT compliance gaps in emerging and low-income economies average approximately 30–40 percent of potential revenue, equivalent to 2–2.5 percent of GDP.

Digital technologies could help governments identify tax evasion, simplify filing and reduce administrative costs. In 2024, approximately 38 percent of surveyed regional tax administrations used artificial intelligence, while 44 percent employed cloud computing.

Singapore and Thailand demonstrate how technology can support automated processing, fraud detection and taxpayer assistance. However, successful digitalisation requires skilled workers, reliable infrastructure and strong data protection.

Public confidence is equally important. The region's median tax administration trust indicator stands at 37, compared with 48.1 globally.

The IMF concludes that stronger tax systems require fair enforcement, transparent institutions and simpler procedures. For policymakers, development partners and private businesses, the priority is building revenue systems that finance essential services, encourage investment and protect vulnerable households without placing unnecessary burdens on economic activity.