National Institute of Public Finance and Policy

Transcription

1 National Institute of Public Finance and Policy VAT coordination in federations and common markets: lessons for India Sijbren Cnossen

2 VATs in federations and common markets: from good to bad to ugly 1. Canada (federal + provincial GSTs) 2. European Union (state VATs) 3. Brazil (federal + state VATs) Unitary systems: Australia, Germany, Russia, Switzerland $ United States? India?

3 Starting from first principles: revenue allocation principles Choice between -destination principle: imports taxed, exports not taxed; and -origin principle: exports taxed, imports not taxed Consensus that origin principle is distortionary and is likely to become an administrative nightmare Destination principle preferred, but requires border tax adjustments (BTAs)

4 European experience Each member state has its own VAT based on the Common VAT Directive EU does not have overarching VAT as in Canada and proposed for India VAT is administered by the member states themselves on a destination basis This requires BTAs in the form of deferred payment or reverse charging

5 BTAs for B2B transactions BTAs for goods: at physical borders or through deferred payment system implicitly or explicitly BTAs for services: always on a reverse-charge basis implicitly or explicitly, except immovable property, cultural services, education, restaurants, catering, transportation of persons, short-term vehicle rentals deferred payment = reverse charging = postponed accounting

6 VAT treatment of interstate B2B transactions Exporter in Austria Importer in Estonia Export transaction Self-declared VAT Domestic sale Interstate export of 100 VAT zero-rated for export VAT declared on acquisition from Austria at Estonian rate of 18% = 18 (18% x 100) with simultaneous credit Sale of VAT = 177 price for final good VAT liability 18 on acquisition 18 on inputs = 0 VAT VAT liability 27 VAT on sale 0 VAT on import = 27 VAT VAT revenue in Austria = 0 VAT revenue in Estonia = 27

7 Goods BTAs for B2C transactions Cross-border purchases taxed on an origin basis Exceptions for means of transport, mail order purchases, and exempt entities Services Cross-border purchases taxed on an origin basis, except immovable property, cultural services, education, restaurants, catering, transportation of goods and persons, short-term vehicle rentals

8 Do BTA methods increase VAT fraud? Forms of fraud Shadow economy fraud Suppression fraud Insolvency fraud Carousel fraud Bogus traders Extent of fraud? National accounts or operational estimates

9 Germany and United Kingdom: Estimates of VAT fraud and evasion in Type of non-compliance Revenue loss as percent of full-compliance VAT Germany UK Shadow economy, including consumption through the business and non-registration Suppression and insolvency fraud Abuse of tax credits Carousel fraud Non-registration Total revenue loss

10 Measures to combat fraud Legal Refusal of right to tax credit Provision of financial security Joint and several liability rules Administrative VAT Information Exchange System (VIES) Central Liaison Offices Secondment of auditors to investigation units in other member states

11 Continued criticisms, focusing on carousel fraud Keen and Smith: current arrangements are ad hoc enforcement strategies and should be rejected in favour of [their] deep solution which would fix the VAT chain by ending the zerorating of trade between member states Taxation of exports is called exporter rating, which is meant to repair break in the VATcollection chain

12 Exporter rating Exporter in Austria Importer in Estonia Export transaction Export sale of 100 VAT imposed on export to Estonia at Austrian rate of 20% Intrastate import price = 120 Domestic sale Sale of output % VAT = 177 price for final good 177 VAT liability 20% x 100 = 20 VAT liability 27 on sale - 20 VAT on import = 7 VAT VAT revenue in Austria = 20 Clearing house flow: 20 from Austria to Estonia VAT revenue in Estonia = 7 Net revenue in Austria = 0 Net revenue in Estonia = 27

13 EU Commission s exporter rating proposals 1. Clearing house (Cnossen, 1983) based on aggregation of individual invoices (complex, costly, adverse impact on enforcement incentives) 2. Home-state taxation (Smith, 1996) Single place of taxation and clearing based on aggregate consumption statistics (perverse effect on choice of business location)

14 Exporter rating proposals in the tax literature Viable integrated VAT (VIVAT) Compensating VAT (CVAT)

15 Viable integrated VAT (VIVAT) EU-wide uniform VAT rate on all intermediate transactions, supplemented by state-specific retail sales taxes; clearing in line with consumption statistics Comments - repairs break-in-the-vat chain, but leaves breakin-the-audit chain intact: fake export invoices may be replaced by fake import invoices - traders have to make onerous distinction between intermediate and retail sales - implications of differentiated rates not considered - taxation of intermediate transactions vs. products

16 Compensating VAT (CVAT) Retention of deferred payment for state VATs but imposition of central tax on cross-border transactions to protect integrity of VAT and to prevent households and unregistered traders from masquerading as registered traders located in other member states (McLure, 2000) Comments - central bureaucracy for no-revenue-raising tax - requires distinction between instate and out-ofstate sales to registered or non-registered persons

17 Further analysis by European Commission Transfers of VAT revenue to other member states Advance payment of VAT by exporters Possible trade diversion Increase in administrative and compliance costs Mismatches between supply and acquisition (purchase) listings Incentive to produce false import invoices

18 Dual VAT (DVAT) Concurrent central and state revenue-raising VATs as in Canada Central VAT administered by state or centre State VATs administered by states themselves or by centre on a destination basis Central VAT monitors interstate transactions Comments - not exporter rating, but deferred payment for state VATs - similar to CVAT, but central VAT raises revenue - central involvement OK for India (if not for EU)

19 Comprehensive reverse charging (proposed by Germany and Austria) Instead of seller, purchaser should always be liable to VAT Means that VAT is converted into retail sales tax Combined with universal cross-checking and possibly VAT bank accounts System change does not improve verification and audit of existing VATs

20 Example of a Reverse Charge System (VAT = 19%) Company A Sells goods to Company B for 100. No VAT is charged. Submits to VAT office Reverse Charge Sales List (RCSL) of customers to whom sales without VAT have been made. Company B Reverse charges itself VAT on purchase price of 100, declaring 19 payable to VAT authorities on the VAT return. Reclaims input VAT of 19 on the same VAT return. No net VAT is due. Sells to Company C for 150. No VAT is charged. Submits RCSL to VAT office. Company C Reverse charges itself VAT on purchase price of 150, declaring payable to VAT authorities on the VAT return. Reclaims input VAT of on the same VAT return. Sells to final consumer for 200 plus 38 VAT. Output VAT of 38 declared on VAT return and paid to VAT authorities. VAT OFFICE Rather than receiving a proportion of the VAT due at each point in the supply chain (fractional payment system), the VAT authorities receive the amount due of 38 in one sum from Company C, once the goods are sold to the final consumer

21 Own observations Exporter rating proposals designed for BTAs on goods (in EU after 1992), but BTAs for services already on reverse charge basis (and goods also in Benelux) Focus on break in the VAT-collection chain instead of the VAT-audit trail System change is not solution to criminal fraud

22 Lessons for India Dual VAT good system, but administrative coordination between Centre and States essential for interstate transactions VAT should have broadest possible base and should be levied at a uniform rate (separate for Centre and individual states) with a sizable registration threshold Perhaps exemption (not zero rate) for unprocessed foodstuffs (possibly, with zero rate for major agricultural inputs) Warning: if you don t do it right the first time, you will not get a chance to correct your mistakes later with deleterious economic and administrative consequences

23 Thank you for letting me share my views with you!