Most countries do not apply VAT to goods and services supplied by public\u00a0sector bodies (including governments).\u00a0The main reasons seem to be concerns about social and distributional issues.
Surprisingly little effort has been made to assess the distortions and compliance,\u00a0and administrative costs that may arise from these provisions. While\u00a0nonprofit and charitable activities are seldom critical issues in developing\u00a0and transitional countries, these countries too are frequently concerned\u00a0about impeding further development of these sectors.<\/p>\n
<\/p>\n
Moreover, the role\u00a0of the state sector is often critical in such countries.\u00a0Some European countries also have rebate systems that compensate public\u00a0bodies for input VAT paid to make exempt or nontaxable supplies.\u00a0In the EU, activities of public sector bodies in education and\u00a0health are exempt while other activities of public sector bodies in their role\u00a0as public authorities are nontaxable. An example is a local government that\u00a0collects refuse. Both nontaxable and exempt activities are considered outside\u00a0the scope of the VAT in the EU, although derogation of nontaxable status is\u00a0possible in the event of a significant distortion of competition.<\/p>\n
The VAT refund schemes for public bodies on the other side, could be justified in the specific context of\u00a0refuse collection apply generally to nontaxable or exempt activities of local governments. The main aim is to compensate suppliers for VAT paid on\u00a0inputs in order to level the playing field between government and private sector supplies. Although we do not have information on the specific refund\u00a0rates, it seems likely that they are usually less than 100% and vary by activity.<\/p>\n
The Netherlands provides refunds for VAT incurred in the Netherlands\u00a0or in other EU member states.<\/p>\n
With the exception of the UK refund\u00a0scheme, which is funded by the central government, all these schemes in\u00a0effect require local authorities to pay for most refunds through reduced grants by the central government since increased VAT receipts are reportedly insufficient to pay for the refund schemes. Local public bodies may\u00a0thus have to increase local property taxes or other local levies while central\u00a0governments receive a small windfall.<\/p>\n
A possible modification would be to permit some degree of departure\u00a0from a pure exemption system, for example, by including goods and services\u00a0that are otherwise outside the scope of VAT in the scope of the tax or by\u00a0converting exempt goods and services into taxable or zero-rated goods and\u00a0services. A variant would be to tax explicit fees charged for public sector\u00a0outputs.<\/p>\n
This approach seems especially appropriate in cases when the fee represents the full consideration and is therefore equal to the market value\u00a0of the supply, as is sometimes the case when goods and services compete\u00a0directly with those supplied by the private sector (e.g., municipal golf courses\u00a0in some countries).<\/p>\n
In reality, however, it appears\u00a0to be not conceptual but political difficulties that block action in the EU.\u00a0Developing countries do not carry the specific political baggage of the EU.<\/p>\n
But they too are unlikely to follow the Australian and New Zealand examples,\u00a0for both political and administrative reasons. Problems other than the proper\u00a0treatment of the public-sector loom larger on the VAT policy horizon of most\u00a0such countries.<\/p>\n
Nonetheless, more thought should be given to this question\u00a0in countries such as Egypt and other present and prospective VAT countries\u00a0in the Middle East and elsewhere in which the state sector constitutes a major\u00a0component of the formal economy and hence of the potential VAT tax base.<\/p>\n
For example<\/em>, the 100% rebate to municipalities under the Canadian system\u00a0is equivalent to zero-rating. Zero-rating is consistent with full taxation\u00a0in the case of public services supplied for nil or nominal consideration.\u00a0But zero-rating is unlikely to be sensible in the context of most developing\u00a0and transitional countries.<\/p>\n First<\/em>, it reduces revenue.<\/p>\n Second<\/em>, neutrality is\u00a0violated if private goods supplied by public\u00a0bodies are zero-rated while private\u00a0goods supplied by the private sector are not.<\/p>\n Third<\/em>, choice between\u00a0taxable and zero-rated goods is also distorted.<\/p>\n Fourth<\/em>, complexity costs are\u00a0increased since rules defining the goods and services to be zero-rated must be\u00a0designed and their implementation monitored.<\/p>\n Finally<\/em>, to reduce the refund\u00a0problems, developing countries should avoid any\u00a0domestic zero-rating if at all possible.<\/p>\n Should countries without well-developed and sophisticated tax administrations\u00a0consider following similar paths?<\/p>\n Once VAT becomes well established,\u00a0could be\u00a0that in some instances they should perhaps do so. No country is given a good VAT administration. It must grow\u00a0one over a (sometimes) long period. Much the same is true with respect\u00a0to growing a taxpayer base that makes the essentially self-assessed VAT\u00a0a feasible revenue source for any country. No tradition of voluntary compliance\u00a0exists in most developing and transitional countries, tax morale is\u00a0low or nonexistent, and\u00a0self-assessment is essentially an alien concept.<\/p>\n The illiteracy of small traders, widespread under reporting of tax liabilities,\u00a0weaknesses in tax administration, and lack of taxpayer service compound\u00a0the problem.<\/p>\n On the whole, countries seem well\u00a0advised not to build the ideal system for their circumstances but rather to\u00a0combine off-the-shelf software\u00a0in ways that fit their particular\u00a0circumstances.<\/p>\n","protected":false},"excerpt":{"rendered":" Most countries do not apply VAT to goods and services supplied by public\u00a0sector bodies (including governments).\u00a0The main reasons seem to be concerns about social and distributional issues. Surprisingly little effort […]<\/p>\n","protected":false},"author":2,"featured_media":6614,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[9756],"tags":[8888],"class_list":["post-7388","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-developing-countries"],"featured_image_src":{"landsacpe":["https:\/\/altax.al\/wp-content\/uploads\/2017\/11\/ps-vat-1140x445.jpeg",1140,445,true],"list":["https:\/\/altax.al\/wp-content\/uploads\/2017\/11\/ps-vat-463x348.jpeg",463,348,true],"medium":["https:\/\/altax.al\/wp-content\/uploads\/2017\/11\/ps-vat-300x200.jpeg",300,200,true],"full":["https:\/\/altax.al\/wp-content\/uploads\/2017\/11\/ps-vat.jpeg",1200,801,false]},"yoast_head":"\n