Letters to the Editor

The VAT in practice

The qualifications and negatives of the VAT, in principle, described by Ebrill, Keen, Bodin, and Summers in their otherwise excellent article, "The Allure of the Value-Added Tax" (June 2002), do not fully and fairly sum up the VAT's demerits in practice, judging from Australia's experience with our VAT equivalent, the Goods and Services Tax (GST).

The GST has horrendous compliance costs for the two to three million smaller businesses now burdened with implementing it, whereas its predecessor, the Wholesales Tax, was imposed on fewer than 100,000 businesses. The GST's huge compliance costs are rarely acknowledged by officials, academics, and big businesses that have the luxury of appraising the tax in principle, like your authors. The onerous compliance costs stem from the need of the taxpayer to examine virtually each and every item of business expenditure and revenue for its tax liability, an utterly unproductive tax self-assessment that smaller businesses cannot afford to entrust to junior or inexperienced staff.

Under the GST, tax self-assessment has become almost an end in itself, tending to edge out the primary objective of business to earn income. The stringent compliance requirements of the GST, in my opinion and that of many accountants and other professionals, threaten the very integrity of the Australian indirect tax system.

The task ahead in Australia now is to reform the tax system, which had been the very political motive for introducing the GST originally.

It would be unfortunate if the enthusiasm of your authors for the VAT induced unsuspecting officials who underestimate the difficulties of complying with the tax to introduce it.

John P. McAuley,

Turramurra, New South Wales, Australia

Michael Keen, Head, Tax Policy Division, IMF replies

The issue of compliance costs is an important one, and it is discussed at some length in Chapter 5 of the book, The Modern VAT, on which the article is based.

While I cannot comment on the Australian experience, I would stress two general points. The first is that, in many developing countries, the tax that the VAT replaces has often been far from easy to comply with (or administer), commonly involving multiple rates, exemptions, and partial crediting arrangements. Though there is little firm evidence to draw on, a simple VAT is often inherently less complex than what it replaces. It may be that...