A global evolution for Indirect Taxes, says PricewaterhouseCoopers

New Delhi, 5 June 2007 : VAT (value added tax) and GST (goods and service tax) are two of the fastest growing taxes globally, a new report launched today by PricewaterhouseCoopers demonstrates. The report, Shifting the balance –the evolution of indirect taxes , offers an insight into the growth of indirect taxes and focuses on a number of key themes such as the shift from direct to indirect taxes, barriers to business and the need for reform, litigation, and the use of technology in indirect tax compliance.

In separate articles, Jeffrey P Owens, director of the Centre for Tax Policy and Administration of the Organisation for Economic Cooperation and Development (OECD), and the Minister of Finance for Belgium, Didier Reynders, share their viewpoints about the global shift from direct to indirect taxation. S Madhavan, indirect tax leader, PricewaterhouseCoopers, India , in an article discusses the relative complexity of the current model in India having prompted the development of the plan to move to a nationally-unified Goods and Services Tax (GST) that will replace both state and federal VAT and create a simplified and integrated system of indirect taxation by April 2010. “Rather than being a new indirect tax, the introduction of GST will be, in effect, an integration and rationalisation of the existing regimes at both federal and state levels.”

Issues such as safety and security and the facilitation of international trade are global challenges at the forefront of the customs arena. The report suggests that there has been a global shift from the tax planning arena towards compliance and trade facilitation, whereby the emphasis is on moving goods across borders without delay and in the most efficient way. In India, customs duties are not seen as erecting major barriers to trade and India has taken significant strides towards reaching its aim of achieving equivalency with the rates in ASEAN countries. To that end, rates have already been cut to 10 per cent with an indication that they will be cut further to between six and eight percent in the near future. There are also proposals to change the way that taxes are applied to imports of goods into India. Currently, imports of goods are not subject to tax in the way that imports of services are.

Environmental tax and regulation is playing an increasingly prominent part in policy making. However, while environmental influences have been seen, the report indicates that few countries have successfully introduced environmental taxes as a fiscal lever to influence behaviour and achieve environmental goals.

The report draws on data gathered from across the PricewaterhouseCoopers global indirect taxes network, and shows how over 141 countries worldwide now operate VAT or GST systems and that those yet to adopt such a system are moving towards one.

It suggests that this could reflect a global trend by governments to focus on the certainty of revenues from VAT/GST and a desire to shift compliance costs from tax authorities to businesses. The report describes how, in light of the evolution of indirect taxation, there is a further challenge not to be forgotten. VAT systems can be regressive in nature and also potentially inflationary. It recommends that governments considering the introduction of such systems to enhance global tax competitiveness, need to bear in mind measures that will ensure a level of welfare for the lower paid individual taxpayers, including the potential for applying reduced tax rates or even zero tax rates for basic goods and services or those supporting other social aims, such as relieving the burden on the elderly or disabled.

Reviewing and comparing systems on an international basis demonstrates that no system is without its flaws. There is a clear tension between the need to eliminate the possibility of non-compliance and fraud with the necessity of ensuring that the burden of administration falling on taxpayers does not encroach their ability to compete. When compared to established VAT systems such as in the European Union, VAT/GST systems that have been introduced in the past decade (e.g. Australia and Singapore) appear to have far fewer opportunities for fraud and higher levels of compliance. The report recommends that the European Commission’s response must include an inclusive debate to address the problems associated with missing trader intra-community fraud (or carousel fraud) which is in context with the need to respond to a highly competitive global business environment.

S Madhavan said, “India has, in a sense, always had a greater reliance on indirect taxes than direct taxes and if anything the trend observed in other countries of a move towards a higher proportion of indirect taxes is reversed in India. It has historically been easier to tax the consumption of goods and services indirectly than trying to tax incomes.” He added, “India’s policymakers have recognised that as an increasingly important international market and the destination for considerable foreign investment, India needs to provide a tax regime that, to the greatest extent possible, integrates closely with the rest of the world. Replacing the current arcane system with a more simple and transparent indirect tax regime is a stated policy aim, but this has to be balanced against the need to make sure that the change is gradual and manageable rather than causing major upheaval by being excessively radical. While the benefits of establishing GST across the country are clear, the approach is best characterised as evolutionary rather than revolutionary.”

• To date, few countries have introduced environmental taxes as a fiscal lever to influence behaviour and achieve environmental goals;
• The facilitation of mutually advantageous trade agreements is a customs priority fro many countries in the developing world;
• While countries are at different stages of development, it is evident that most base their VAT/GST models around the traditional EU example;
• There is a general global trend towards broadening the base of goods and services to which VAT/GST applies;
• Most countries have a high level of voluntary compliance, particularly among larger companies. In some countries, it is evident that smaller companies are struggling with the compliance burden for indirect taxes;
• There is a general global trend for tax authorities to take a more aggressive approach to compliance and penalties are reflecting this;

• All countries with a VAT/GST regime are now using automation to some degree, with the exception of Mexico which appears to be the only remaining paper-based system.