Time change and so VAT should do

Good tax administration is primarily a middle-range problem of developing and implementing a process capable of achieving its policy goals (such as revenue and equity) efficiently and effectively. Both a good information base and the capacity to utilize that information effectively are essential tools for this task.

Good data are also needed to formulate good revenue policy. As an example, information on the revenue forgone as a result of different exemptions and exclusions is essential in determining the revenue and distributive effects of various policy options. A regular reporting system with respect to such tax expenditures is needed to ensure that revenues forgone through tax policy measures such as VAT exemptions intended to achieve distributional or allocative goals are subject at least periodically to some form of monitoring.

In the absence of such estimates, once an interest group has received a tax concession, it may enjoy the results forever after without having to demonstrate to anyone that the benefits it receives warrant the costs incurred. Better data (e.g., on a sectoral and commodity basis) are also often necessary to address such critical issues as the substitutability and complementarity of tariffs and VAT.

Little attention is paid to such issues.

Nonetheless, our experience is that with relatively little effort some approximate information on many such matters can be obtained. The reason little is done is not so much that it cannot be done at reasonable cost with available resources but that no one tries to do it.

At present it is seldom in anyone’s interest to make much effort along these lines. One reason is that the existence of information always has a public good aspect so that not all the benefits can be captured by any one individual or group.

Another is that better information may have an adverse effect on the interests of some powerful people. Such factors seem sufficiently strong in most countries to ensure that most decisions about both tax policy and tax administration continue to be made more on the basis of faith than of evidence.

Some facts important to understanding the way VAT really works are surprisingly difficult to uncover in many countries.

Consider the real nature of the VAT base.

In Albania, in 2015 over 65% of all VAT collections were from imports and the traditional excise sector (alcohol, tobacco, and fuel). The implication is that the immediate result of introducing VAT in Albania, in 1996 was actually to reduce sales taxes collected on the non-import non- excise sector from over 4% of GDP to less than 2% of  GDP. Such estimates do not imply that introducing VAT was not a good idea. However, they do suggest that anyone who thought the economic impact of Albania’s new VAT was similar to that in, for example, Germany just because it looked similar was not looking at reality.

Similar data gaps in most developing and transitional countries make it difficult to estimate the likely revenue consequences of base and rate changes in VAT. Such problems should not exist since almost all the needed information is generated in the normal process of administering VAT. Seldom, however, are such data made available in a usable form even to local tax offices, let alone used either in allocating administrative resources or in improving tax policy.

VAT is the only tax that requires the government not only to collect substantial money from the private sector but also to pay much of it back to the same people in the form of input tax credits. Since any VAT invoice constitutes a potential claim on public funds, and falsifying such claims is perhaps the most common form of VAT fraud, it is critical from an administrative
perspective to have a detailed knowledge of the normal or expected pattern of credits and liabilities for firms in all the different lines of business subject to VAT.

Again, however, although the normal operation of an invoice-credit VAT generates such information, it is striking how seldom such data are either collected in usable form or used for devising a risk management strategy. Perhaps even more surprising is that this whole question has not until very recently received much attention from the international community of VAT experts.

A final general observation is simply that, as with all taxes in all countries, no VAT in any country, however well designed and well administered it may be initially, will forever remain the same.

Times change and so must taxes.

Keeping up in taxation requires an ability to read the winds to detect important emerging tax issues, to work out in detail how best they may be dealt with, and to devote time and energy to changing tax design and administration to cope with changing circumstances.

Life is more difficult in all aspects for those concerned with tax matters in developing and transitional countries simply because, almost by definition, such countries are not only more likely to change especially if they succeed in growing and developing but also likely to be more vulnerable than most developed countries to winds from abroad, and they generally have much less capacity to cope with all these problems.