This paper discusses the evolution of key taxes in the past 20 years in developing Asia and fiscal challenges that these countries face in light of the coronavirus disease (COVID-19) pandemic. It presents estimates of tax capacity and tax potential, and discusses the productivity of key taxes in the region. The paper finds that developing Asia has potential to raise more revenues—of up to 4% of gross domestic product on average.

While corporate income tax productivity is high vis-à-vis other regions, the same does not apply to personal income tax or the value-added tax. There is potential to raise more revenues by improving the compliance and design of the value-added tax. It is important to ensure that the tax systems in developing Asia become more progressive with expansion of personal income and property taxes. Increased allocations and better targeting of social spending would help offset some of the regressivity stemming from indirect taxes. An important source of revenue leakage is tax expenditures granted by countries in the region.