Dr. Md. Abdur Rouf :
The concept of Value Added Tax (VAT) emerged in Europe in the 1920s in the backdrop of the need for eliminating tax on tax and shifting tax burden of this genre of the consumption tax upon the ultimate consumer. In the mid-1930s, VAT was introduced in France in a limited scale and in 1950s, France expanded VAT to all levels, i.e. import, manufacturing, wholesale and retail. Meanwhile, following the end of the World War II and decolonization of Asia, Africa and Latin American colonies, the European countries felt the need for regional cooperation that was absent there for centuries and with this objective they formed the European Economic Community (EEC) to harness potentials for regional integration aiming at their common development. It was felt that harmonization of physical and economic infrastructure and regulations was necessary for effective regional integration. VAT, meanwhile practiced and well resulted in France was then considered a better system of taxation on consumption; so, it was recommended for all members of the EEC to be introduced soon. Thus, VAT quickly expanded in Europe. Meanwhile, International Monetary Fund (IMF) and the World Bank (WB) accepted the idea of VAT and started pleading for it aiming at tax reforms in the countries seeking IMF and WB loans. Thus, VAT quickly expanded globally and today 166 countries are practicing VAT in any form.
VAT developed as a preventive measure against tax on tax. Government needs to collect revenue in a convenient manner, no matter from which tax it is generated. Government has fixed different bases for different taxes. For instance, income is the base of income tax. Use of road by vehicle is the base of road tax. House, factory, building, establishment is the base of holding tax. Import is the base of import tax. In some countries, there is inheritance tax where inheritance of parental property is the base. Value addition while selling goods and services is the base of Value Added Tax.
The other day, in a gathering of accountants, one said that VAT means vast accounting task. In our country, VAT accounting has become more complex than general accounting. A business is to comply all relevant laws of the land, i.e. company law, tax law, labor law, environment law etc., of them VAT law demands maintenance of more accounts compared to all other laws. Justification of keeping so many accounts for VAT purpose has been checking the propriety of input tax credit that has been introduced to prevent tax on tax. As mentioned earlier, tax on tax cannot be completely prevented. In an effort to remove tax on tax, maintenance of huge VAT accounts has made the VAT system unbearably complex, laborious, time-consuming and costly compelling businesses to hire consultants, being unable sometimes even choosing non-compliance and evasion. Maintenance of so many accounts for VAT purpose has made strong dent on the ease of doing business.
If tax can be easily collected on a base where another tax is marginally included, we find no harm it. After all, tax has to be paid by the people in any form. Maintenance of huge accounts for ensuring input tax credit to remove tax on tax appears to be an unnecessity in an age when proper automation can guarantee the trails. Tax requires to be collected in the simplest possible way. Simplicity demands less accounts. Our present VAT system demands more accounts mainly to ensure availing proper amount of input tax credit by the tax-payer. Input tax credit has been designed to remove tax on the base of tax, though after performing all these strenuous exercises, people are paying the tax at some other places. Things appear have become unnecessarily complex, widespread application and retention of collected tax has become challenging because a large portion of the paid tax is taken back by the tax-payers as input tax credit.
In my opinion, the solution lies in the basic premise of VAT – lowest possible single rate and widest possible coverage. If the rate of the tax is the lowest, then demand for input tax credit shall not rise, it shall be easier for people to pay tax. Single rate shall draw tax equally from the rich and the poor. So, a portion of the collected tax shall require to be given back to the poor as safety net packages to ensure equity and justice. It is time to rethink the Value Added Tax (VAT) theory in line with lowest possible single rate and widest possible coverage, eliminating huge accounts, removing input tax credit and doling out a portion of the collected tax to the poor. Thus, more revenue can be collected and administration of VAT can be made simpler too.
(Dr. Rouf is a VAT expert, currently working as Director General, Customs Intelligence and Investigation Directorate. Opinion expressed in this article are his personal. Email: [email protected])
