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Value Added Tax, popularly known as ‘VAT’, is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service. In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect on the first time on 10th April, 1954.
From its inception, the value added tax system was imposed on all major sectors of France – the first country to use this system. Once instituted, it was immediately clear that revenues collected from the VAT system constituted a substantial share of the government’s revenue in the French economy. Not surprisingly, due to the ease of payment and ready comprehensibility, the value added tax system has been adopted by different nations across the world. VAT is intended to be levied – or charged – whenever there is some value addition to raw material.
While Value Added Tax (VAT) and Goods and Services Tax (GST) have been a part of tax landscape in Europe for the past 50 years or so, they have only become a regular occurrence in the Asia Pacific region in the past 10 to 20 years. It has been said that VAT is still an adolescent tax in Europe. In Asia, it is very much in infancy. VAT/GST is still finding its feet, and in many Asian countries it has not yet found its voice. Few do not have a VAT/GST system in place and those without are either in the process of introducing one or more are seriously considering the option. As the economies in this region grow, so will the importance of the indirect taxes. VAT is, arguably, the most efficient and effective method of providing the revenue that governments need, without stifling the growth of business.
Asia Pacific – The Next Economic PowerhouseAsia Pacific is an extremely large and diverse region with economies and societies ranging from the highly developed (e.g. Australia) to the slowly developing (e.g. Myanmar). Clearly, there are many challenges facing the region as different as different countries develop, at different rates. Despite these challenges, the region has vast potential for growth. Containing the two most populous countries in the world (India and China)and more than half of the world’s population, the potential of the Asia Pacific marketplace is enormous. In the past 10 years, or less, the region has developed to become an important economic powerhouse. China has become the world’s fourth largest economies and has fast become one of the world’s most influential economy.
This has also not gone unnoticed by the current major powerhouses – US and the EU. Both have significantly increased their investments in the region over the past 5 years. Likewise, investments from the Asia Pacific region into the US and the EU are also increasing.
Indirect Taxes In The Region – What Is To ComeVAT and GST are gradually becoming more established in the Asia Pacific Region. South Korea was the first to introduce a VAT system in 1976. Over the years, more countries have adopted an indirect tax system, with a large increase in introductions in the 1990’s. The latest country to adopt a VAT system is India, where it took effect from 1st April 2005. Currently, VAT in India is collected with a number of other state and federal taxes on consumption and the indications are that it will take some time before VAT becomes the main or only indirect tax. It is interesting to note that a report published a few months after the introduction of VAT indicated that it was already having a noticeable positive effect on the government finances for some of the Indian States. Two countries with plans to establish indirect tax systems are Hong Kong and Malaysia. Hong Kong’s proposal to introduce GST in the next few years will depend upon the outcome of a public consultation planned for mid 2006. Malaysia’s plans to introduce a GST on 1st January 2007 have been postponed.
A Copy Is Not The Same As Original – The Differences Between The EU And Asia-Pacific Indirect Tax SystemsIt needs to be understood that while Asia Pacific countries may have an indirect tax that is known either as VAT or GST, many of these do not conform to the model generally known to European VAT specialists. In many cases, these taxes are structured more like sales tax and are often without any input tax recovery mechanism. A prime example of this is China, where VAT was introduced in 1994 as part of the package of indirect taxes. In China, VAT only applies to goods and the provisions of repairs, replacement and processing services. VAT is only recoverable on goods used in the production process. VAT on fixed assets is not recoverable as input tax. Exports of goods are zero rated. However, the amount of input VAT that can be recovered against exports has varied considerably over the past 10 years. It has ranged from being more or less fully recoverable to only 13% recoverable. With a tax rate of 17%, this means that companies doing business in China need to be aware of the real cost of VAT, even for exports. In addition, businesses need to cope with other turnover taxes such as business tax and consumption/ excise tax.
While the indirect tax systems in other Asia Pacific countries may be more recognizable to European VAT specialists, they can still be very complex. For example, there are 5 positive rates, a zero rate and over 30 categories of exemption on Indonesia. This is extremely difficult to administer, especially as most businesses in Indonesia are registered and their accounting systems are not always sophisticated.
On the other hand, there are countries such as New Zealand and Singapore where the indirect tax systems are probably the simplest in the world. Virtually everything is taxed at one rate and exemptions are kept to a minimum. The structures and complexity of the indirect tax systems vary considerably within the region. One of the biggest dangers for a VAT /GST advisor is to assume that an understanding of the European model transfers into an understanding of how indirect tax works in each of the Asia Pacific countries. While the legislation may look similar, key words or phrases may be missing or subtly different. Local tax authorities also often adopt an “interpretation” that is contrary to that taken by the country from which the legislative provision was adopted. In addition, in many of the Asia Pacific countries, the tax authorities and the systems to account for indirect taxes can be cumbersome and inflexible. Administrative tasks will often take far longer to complete than in other parts of the world. Refund may be impossible or only made after extensive audits. There is often little consistency in interpretation, or objectivity, even from tax officials in different offices within the same country.
There is also, generally, a lack of case laws and businesses cannot rely on EU case law to convince the local tax authorities that their approach is the right one. It is therefore imperative for businesses to seek advice from locally based specialists. They understand how the indirect tax system works in their country and are able to guide businesses through the best way to negotiate with the local revenue authority.
Understanding Indirect Taxes In Asia PacificDespite moves to liberalize trade in the region, there are still many instances where the operation of VAT or GST creates serious problems. This is often teamed with punitive penalties for errors. For example, fear of fraud means that in many countries full audits are routinely carried out before refunds are made. These audits will often look at all taxes, not just VAT or GST.
Clearly, there is still a long way to go to achieve predictable and effective indirect taxation in the region. The ASEAN goal of a tariff free region is laudable and should be possible within reasonable timescales, as long as the political will is strong. However, the chances for a single market similar to the EU, where goods move cross border without Customs inspection or VAT/GST is very remote.
Given the economic growth in the region and its growing importance to the world in terms of both production and consumption, companies with ambitions to be truly global will have to trade in the region. When they do, they will need to deal effectively with indirect taxes to ensure that their business plans are executed successfully. This will mean not only understanding the administrative issues but also costs in time, “stuck” tax and potential penalties.
Understanding the impact of indirect taxes on business plans is often far from easy, making indirect taxes a huge challenge for businesses operating across the region.
· Richard Bird, “Administrative Dimensions of Tax Reform”, 10 Asia-Pacific Tax Bulletin 3 (2004).
· Richard Bird and Milka Casanegra de Jantscher, Improving Tax Administration in Developing Countries, IMF Washington (1992).
· Paulo Dos Santos, VAT Introduction-Administrative Issues, CARTAC (2002).
· Carlos Silvani and Katherine Baer, Designing a Tax Administration Strategy: Experiences and Guidelines, IMF Working Paper 97/30 (1997).
· Janet Stotsky, “Summary of Tax Policy Advice”, Tax Policy Handbook, Fiscal Affairs Department IMF (1995), edited by Parthasarathi Shome.
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