Many analysts have expressed concerns about the compliance costs\u00a0VAT imposes on small business.<\/p>\n
These concerns are legitimate. A recent\u00a0study of Croatia, for example, found VAT compliance costs to average 31%\u00a0of VAT revenues for businesses with fewer than six employees.\u00a0Similar results have been found in many other countries. Such concerns have led many VAT countries to introduce\u00a0various forms of special treatment for small traders.<\/p>\n
<\/p>\n
One key decision point in VAT design related to this issue is the\u00a0appropriate threshold at which to require firms to register for VAT. Another\u00a0such point is whether small firms, whether included in the VAT system or\u00a0not, should be subjected to some simplified tax. Thresholds range from\u00a0none in some countries (e.g., Sweden) to an annual turnover of over\u00a0U.S.$600,000 in Singapore. Some countries differentiate by line of\u00a0business. Some permit voluntary registration of those below the threshold.\u00a0Some impose a simple presumptive tax (usually based on gross receipts) on\u00a0small sellers, although few make much effort to ensure that the rate or rates\u00a0applied bear some relation to the VAT that should be collected.<\/p>\n
Simplified Regimes<\/p>\n
In addition to simply collecting a little money from some people who otherwise\u00a0might not be taxed, advocates of simplified special regimes usually have\u00a0additional goals such as relieving small taxpayers from some of the compliance\u00a0burden imposed by a relatively complex tax like VAT and hence encouraging\u00a0the growth of small business.<\/p>\n
Another aim sometimes mentioned is to\u00a0begin to educate taxpayers by, as it were, sending them to fiscal kindergarten\u00a0before admitting them as full members of the regular taxpaying population.<\/p>\n
Other plausible rationales for such systems may be to reduce opportunities\u00a0for corruption and harassment of taxpayers, to reduce administrative costs\u00a0of dealing with small taxpayers, and, by encouraging better record-keeping,\u00a0to improve tax administration in general.<\/p>\n
A further aim\u00a0is often both to discourage the growth of the informal economy and to\u00a0increase revenues from this sector by equalizing tax burdens between the\u00a0formal and informal sectors to some extent.\u00a0Such arguments appear to assume that there is no difficulty in determining\u00a0which firms are small. They are like giraffes: one knows one when one\u00a0sees one. This assumption is wrong in many developing and transitional\u00a0countries. It is in the nature of the tax business that the clients are not\u00a0willing customers; indeed, most of them would be delighted to get out of\u00a0the system and they often try to do so. Not only genuinely small businesses\u00a0may look small. Profitable large- or medium-sized businesses may also try\u00a0to signal that they are small for tax purposes. Moreover, firms may be losing\u00a0money but still functioning precisely because they do not pay over taxes such\u00a0as VAT that they collect as agents but spend as though they were principals.<\/p>\n
In the long run the very\u00a0existence of presumptions of various sorts in many VAT systems in itself\u00a0provides evidence of the inability or unwillingness to rely on taxpayer self-assessment\u00a0as the first line of administration. Recourse to this approach\u00a0thus both signals a general lack of trust between government and citizen\u00a0and in all likelihood probably further delays the development of the kind\u00a0of taxpayer culture that must be developed over time if an\u00a0inherently self-assessed tax such as VAT is ever to function adequately. The\u00a0second risk is more immediate.<\/p>\n
How can countries with (by definition)\u00a0weak administrations keep out of the simplified system large and medium\u00a0enterprises that try to look like small enterprises and thus hide themselves\u00a0from the tax collector’s eye?<\/p>\n
Two conditions must be satisfied to ensure that simplified systems satisfy\u00a0either the fiscal or the nonfiscal rationalizations commonly offered in their\u00a0defense. First<\/em>, one has to ensure that as the truly small become bigger they\u00a0will graduate into the normal tax system. Second<\/em>, and of more immediate\u00a0importance, one must also ensure that those who are in the normal system\u00a0already or who should be in that system cannot easily migrate into the\u00a0simplified system by taking on the disguise of smallness to shield themselves\u00a0from taxation. The temptation to shelter from the fiscal blast within\u00a0such systems is likely to be especially strong when, as experience suggests is\u00a0usually the case, the effective tax rates applied to those who make it to the\u00a0safe harbor of the simplified system are considerably lower than those in\u00a0the normal tax system. If the simplified rate is higher than the normal tax\u00a0(including compliance costs), presumably no one would be in the simplified\u00a0system.<\/p>\n Since in most countries where simplified options are available, they\u00a0appear to be extensively utilized, one must presume that the effective tax is\u00a0lower.<\/p>\n Since such systems are often introduced in response to strong political\u00a0protests from segments of the business community, it seems plausible\u00a0and is indeed evident from experience in a number of countries that the\u00a0effective rate may be markedly lower.<\/p>\n In practice, most developing and transitional countries have difficulty\u00a0in distinguishing between truly small firms that may not keep good books\u00a0and records but are potentially (and legally) taxable and other firms with\u00a0activities that are clearly large enough to fall within the tax system but\u00a0are tax evaders.<\/p>\n Some in the latter group may be completely off the fiscal\u00a0radar so-called ghosts. Others are more like icebergs in that the portion of\u00a0their activities visible to the authorities may be minuscule compared to the\u00a0hidden reality.<\/p>\n Special (simplified and presumptive)\u00a0substitutes for real taxes such as VAT may in some ways seem a feasible\u00a0approach to reach at least some evaders. But this approach also fragments\u00a0the tax system and is hence inconsistent with good tax administration.<\/p>\n Whenever a disconnect is created between a special tax regime and the\u00a0general tax system, problems are likely to emerge.<\/p>\n Whether the aim\u00a0of a special tax regime is to supplement a normal VAT by replacing its\u00a0complexities with a simplified regime for small business or to move some\u00a0shadowy firms into the fiscal light, explicit transition arrangements are\u00a0needed to link the special regime to the more general tax system within the\u00a0context of the prevailing tax administration constraints. Unfortunately, in\u00a0practice little attention seems to have been paid to this critical issue in most\u00a0countries with such regimes.<\/p>\n An additional problem such systems impose for VAT is that since firms\u00a0within special tax regimes are generally not included in the VAT chain,\u00a0the number of transactions legally outside the VAT system is increased. Of\u00a0course, since purchases from these taxpayers by regular VAT sellers cannot\u00a0be used to claim input credits, they have an incentive voluntarily (or perhaps\u00a0under pressure from their customers) to enter the VAT system. How effective\u00a0such an incentive is likely to be, however, is far from clear given the general\u00a0difficulties most developing and transitional countries face in policing the\u00a0fringes of VAT.<\/p>\n For example, other registered sellers some of which may\u00a0themselves be conducting significant shadow business may agree to issue\u00a0VAT receipts for such outside entities in their own name for a cut of the\u00a0gains, a practice that seems not uncommon in countries with large shadow\u00a0economies and weak tax auditing capacity.<\/p>\n Attempts to supplement a VAT\u00a0by some kind of simplified system may thus end up making matters worse\u00a0by creating the risk of migration to the less expensive system, particularly\u00a0when, as is too often the case, once firms are safely ensconced in the small\u00a0sector, they are able to remain there almost indefinitely with little or no risk\u00a0of audit or exposure.<\/p>\n","protected":false},"excerpt":{"rendered":" Many analysts have expressed concerns about the compliance costs\u00a0VAT imposes on small business. These concerns are legitimate. A recent\u00a0study of Croatia, for example, found VAT compliance costs to average 31%\u00a0of […]<\/p>\n","protected":false},"author":2,"featured_media":6831,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[9756],"tags":[8241,8567,8224,9131],"class_list":["post-7467","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-economy","tag-tax-regime","tag-taxes","tag-traders"],"featured_image_src":{"landsacpe":["https:\/\/altax.al\/wp-content\/uploads\/2018\/01\/biznesi-tvsh-1140x445.jpg",1140,445,true],"list":["https:\/\/altax.al\/wp-content\/uploads\/2018\/01\/biznesi-tvsh-463x348.jpg",463,348,true],"medium":["https:\/\/altax.al\/wp-content\/uploads\/2018\/01\/biznesi-tvsh-300x169.jpg",300,169,true],"full":["https:\/\/altax.al\/wp-content\/uploads\/2018\/01\/biznesi-tvsh.jpg",1280,720,false]},"yoast_head":"\n