Under the VAT system, consumers are required to pay an additional 10 percent of the core price of particular products purchased domestically or imported from abroad.
The VAT is set to replace the old business tax system, under which the government charged companies 5 percent to 10 percent of their business profits.
The Deputy Minister of Finance, Mr Sila Viengkeo, told Vientiane Times on Monday that the ministry is redefining various sources of national revenue clearly.
It was also seeking to identify in which ways taxation of SME businesses could be formalised through VAT system. "For example, some noodle soup shops could be charged through the VAT. We are also installing VAT electronic payment machines for shops which meet the requirements of our ministry," he said.
Currently, the majority of SME businesses pay taxes through negotiation reached between the owners and relevant authorities.
This consultation style process for tax payment will be halted once the VAT system is introduced for SME sector, Mr Sila said.
At the moment, the primary challenge is that the number of sources for collecting revenue is unclear since the figures for business units of the Ministry of Industry and Commerce and the Ministry of Finance do not tally.
For instance, the Ministry of Industry and Commerce has issued licenses for 100 business units in a particular district, but the Ministry of Finance only collected taxes from 50 to 60 business units in the same area.
The reason could be linked to various factors.
One of them is that owners ceased operating their businesses due to falling number of customers.
Another reason may be that officials obfuscate the real figures for their personal benefit.
As such, scrutiny into this matter remains required.
Laos began introducing value-added taxes in 2010 as part of Asean economic integration, which required companies with an investment of more than 400 million kip to use VAT.
The VAT enables the government to raise the revenue needed to offset the loss from tariff reductions agreed to in support of greater regional economic integration.
Another challenge is that many SME enterprises do not understand about the VAT, so more information is needed to ensure local business people comprehend their taxation liabilities.
Economists say the introduction of VAT is beneficial because it will enable the government to collect taxes more accurately based on the number of consumers' purchases.
The introduction of VAT also requires the cooperation of purchasers.
Consumers ought to request a receipt every time they buy an item so the purchase is recorded and business operators pay the requisite tax due to the government.
Without a receipt there is no proof of sale and proprietors might be tempted to avoid paying the 10 percent tax.