This blog is written by Mr. Habib Ullah Khan, Associate Taxation and Corporate Services. Please read this blog and provide your valued comments.
VAT – what is it?
VAT is a tax on the value added generated at each stage of production and distribution. In many countries, this means each business in the supply chain collecting the tax and remitting it to the government. It is calculated by a VAT registered supplier charging VAT on sales. The supplier is liable to pay this VAT to the tax authorities. The customer pays the VAT charged by the supplier. In order for the tax to be borne by the ultimate consumer and not on each business, a key feature of VAT is that a business can deduct the tax that it incurs on its purchases from the tax that it collects from its customers. The VAT registered supplier pays over to the tax authorities the difference between VAT charged on its sales less the VAT incurred on its purchases. In this way, the tax differs from retail sales taxes which are imposed, in theory, just once at the point of the final sale to the consumer.
For the VAT specialist though, there are many similar issues between VAT and sales taxes; for sales taxes, each supplier in the chain still requires controls on sales: usually suppliers have to prove that the sale is not made to a consumer in order for sales tax not to be due on the sale.
VAT compliance: The impact on business and how technology can help.
The world of VAT has undergone considerable change in the relatively short time since we published our last report on VAT compliance seven years ago. As the world becomes more connected and the digital economy comes of age through mobile technology, cloud computing, business intelligence and real time reporting, we see an increasing number of tax authorities and businesses around the world adopting or reforming their VAT compliance systems to take advantage of the opportunities afforded by technological developments such as data analytics, wide spread safe payment technology and digital transaction processing.
The Paying Taxes indicator, which forms part of the World Bank’s annual Doing Business project, uses a model case study company3 to look at the ease of paying taxes in 190 economies and this provides insight into the development of VAT systems. VAT (including GST) is now the predominant form of consumption tax around the world with 162 of the 190 economies in Paying Taxes 2017 4 having a VAT system in 2015. This is an increase of 15 countries from 2010 and the spread of VAT shows no sign of abating with more countries, including India and the Gulf States, introducing VAT systems within the next couple of years. The trend may be influenced by recent falls in corporate income tax as a percentage of governments’ total tax revenues.5 The resulting shift from direct to indirect tax brings fresh challenges for both governments and businesses; each needing to adapt to ensure they have the right systems and resources available to make compliance with VAT requirements as accurate and efficient as possible for all.
Tax authorities are increasingly implementing electronic reporting systems, including “real-time” transaction reporting systems. They are also requiring the use of electronic invoicing, and submission of a Standard Audit File for Tax Purposes (SAF-T) together with the introduction of logical algorithm systems which capture additional data on VAT returns. It is however not clear whether tax authorities are currently fully able to exploit all the data afforded by these systems, but they will very probably be able to do so in the future.
Using the data from the Paying Taxes study, we look at how the VAT compliance burden for businesses has changed globally since our last VAT review in 2010. We also look at how VAT systems have evolved in a number of countries and consider whether the data can highlight where there might be examples of good practice, both by business as a response to developments by governments, and in tax collection by governments in response to the challenges faced by business. We also consider how these systems might continue to evolve.
- Value added tax (VAT) is the most common consumption tax system used around the world with a form of the tax existing in 162 of the economies covered by Paying Taxes 2017.
- Since 2008, 15 economies, have introduced a new VAT system and this list is expected to grow further with the introduction of VAT in India in 2017 and in the Gulf States in 2018.
- According to Paying Taxes 2017, the annual time to comply with VAT for the case study company ranges from 8 hours per year in Switzerland to 1,189 hours in Brazil – which is equivalent to one working day in Switzerland and nearly 30 weeks in Brazil. Although the guiding principles of these consumption taxes are broadly the same everywhere, the rules have been enacted and implemented in such a variety of forms in different countries that the compliance burden on business varies considerably.
- The time to comply varies even between countries of a similar level of development and with VAT systems which are similar in principle, such as the EU Member States. In Luxembourg, the Paying Taxes case study company only needs 22 hours a year to comply with VAT compared to 165 hours in Bulgaria.
- The level of development of an economy appears to affect significantly the time required to comply with VAT. It is currently taking less time for businesses to comply in higher income economies. Will this stay the same as more countries across the income spectrum adopt real-time filing and reporting systems, and as businesses react to these developments and to other changes in technology?
- On average across the world, the VAT compliance time for the case study company fell by 17% from 128 hours in 2008 to 106 hours in 2015. The reduction appears to be connected to the implementation, expansion and improvement of online VAT systems and of business IT solutions more generally. Even though the time to comply has reduced on average, we see in the EU that the time to comply is generally higher where filing VAT returns requires the submission of additional documents such as invoices.
- It takes 27% less time on average to comply with VAT obligations in countries where businesses pay and file VAT online. Since 2008, 26 more economies have adopted electronic filing and payment systems to make VAT compliance more efficient and to help reduce fraud and evasion.
- Paying Taxes has historically focused on the time required for VAT compliance up to the filing of VAT returns. The Paying Taxes study now also looks at the time required to obtain a VAT refund in certain specific circumstances created for the case study company. The time to obtain a refund ranges from just over 3 weeks to around 106 weeks with a global average of 21.6 weeks. The new sub-indicator provides new insights on how well the post filing process works. It will be interesting to see how the results develop over time in response to changing technology and processes.
- Tax authorities hope that new information technology will reduce fraud, improve compliance and speed up the process of obtaining a VAT refund. Several countries are taking advantage of information technology to standardize the reporting and presentation of VAT information with a number of European countries implementing the Standard Audit File for Tax,6 while real time and/or daily invoice level reporting requirements are being introduced for example in China, India, Spain and Italy.
Habib Ullah Khan