Avoid Disincentives
Ending VAT Exemptions: Towards a Post-Modern VAT
Abstract: The proliferation of exempt supplies in VAT systems, particularly the traditional European VAT, undermines the integrity of the tax in many respects. Exempt supplies bear a tax burden equal to the input tax imposed along the supply chain up to the exempt supply. This leads to overtaxation of business customers and undertaxation of final consumers. The neutrality of a benchmark VAT is replaced by economically inefficient biases and distortions. Unclear borderlines between exempt and taxable supplies increase compliance costs and administration costs. This paper reviews the types of exempt supplies that fall into two broad categories -- merit or concessional exemptions such as those for education or health services, designed to reduce taxation to achieve social benefits, and those adopted for technical reasons including exemptions for immovable property and financial supplies. It explains the origins of the exemptions and explores reform options to bring exempt supplies within the ordinary system of taxable supplies with full input tax recovery for businesses.
Full Text »
Citation: De La Feria, Rita, and Richard Krever. “Ending VAT Exemptions: Towards a Post-Modern VAT.” In VAT Exemptions: Consequences and Design Alternatives. Wolters Kluwer, 2013. https://ssrn.com/abstract=2273111.
VAT Rebates and Export Performance in China: Firm-Level Evidence
Abstract: A destination-based VAT system without a complete export tax rebate is detrimental to a country's exports, while an increase in the VAT rebate rate helps reduce the negative effects. In this paper, we study the role of VAT rebates in affecting Chinese exports using firm-level panel data for 2000–2006. To address potential endogeneity, we rely on a quasi-natural policy experiment in 2004, when the fiscal conditions of local governments became important in determining the actual VAT rebate rates for exports. The empirical findings demonstrate significant and large effects of VAT rebates on export volume. On average, for each percentage point increase in the VAT rebate rate, the amount of exports increased by 13%, which translates into an additional $4.70 of exports for each $1 of export tax rebates paid.
Full Text »
Citation: Chandra, Piyush, and Cheryl Long. “VAT Rebates and Export Performance in China: Firm-Level Evidence.” Journal of Public Economics 102 (June 2013): 13–22. https://doi.org/10.1016/j.jpubeco.2013.03.005.
VAT Refunds: A Review of Country Experience
Abstract: A key feature of the invoice-credit form of value-added tax (VAT) is that some businesses—notably exporters—will pay more tax on their purchases than is due on their sales, and so can seek refunds of excess credits from government. While refunding is straightforward in principle, serious problems arise in practice, including opportunities for fraud and corruption, and denial of refunds by governments with cash shortages. This makes the refund process the “Achilles heel” of the VAT. This paper examines the refund approaches of tax administrations in 36 developing, transitional, and developed countries. It evaluates the effectiveness of these approaches and suggests a model of best practice that takes into consideration compliance issues faced by countries during different stages of development.
Full Text »
Citation: Harrison, Graham, and Russell Krelove. “VAT Refunds: A Review of Country Experience.” IMF Working Paper WP/05/218, 2005. https://www.imf.org/external/pubs/ft/wp/2005/wp05218.pdf.