Mexico's VAT Zero Rate Means Millions in Foregone Taxes; Social Impact Needs Evaluation

Mexico's federal government is missing out on substantial revenue due to tax exemptions, with the zero rate on Value Added Tax (VAT) being a major contributor to this "tax expenditure," according to the Tax Research and Budget Center (CIEP).

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the zero rate on Value Added Tax (VAT) is one of the most important fiscal costs that the federal government fails to collect each year.

The CIEP highlights that in 2026, ten key tax expenditures are projected to cost the government 775.8 billion pesos, equivalent to 2.08% of the GDP. The majority of this amount, 536.4 billion pesos (1.44% of GDP), comes from broad-reaching exemptions that benefit a wide range of taxpayers.

Among these, the zero VAT rate on food, medicine, and water, along with exemptions for education and housing services, are commonly justified by their link to basic needs and social relevance. However, the CIEP points out that these broad measures benefit all households, irrespective of their income level or actual need.

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more than publishing each year what the federal government will stop collecting due to various exemptions and preferential tax treatments, more transparency is needed and an evaluation of its impact must be made.

For instance, the zero VAT rate on food alone represents a foregone revenue of 471.7 billion pesos, or 1.26% of GDP. The CIEP argues that the effectiveness of such measures should be rigorously analyzed to ensure the benefits reach lower-income households proportionally and to explore potentially more targeted alternatives.

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the zero rate on food illustrates the type of problem that justifies its inclusion in this agenda.