The structure of the paper is as follows. SectionII provides a brief, stylized overview of existing VAT rate structures, revenue performancesand tax bases.
The empirical methodologyand the estimatedmodelsare presented and discussed in sectionIII. Section IV contains concluding remarks and policy implications. First, a worldwideaverage VAT rate of Our sample extendsSilvani's data to include countries with multiple VAT rates, resulting in somewhatlower overall revenueproductivityratio.
Averagerevenue productivityratio for multiple VAT rate countries 0. Second, the most conmmonly used single VAT rate is 10 percent, u-ed in 9 countries representingabout 20 percent of the total, followedby the rate of 15 percent, which is used in 3 countries.
This is consistentwith the recommendationsof most tax advisors to adopt the VAT at a single rate between 10 and 20 percent'. Seven of the remaining 25 used two rates; nine used three rates; and the remainingnine use more than three rates. Thesemultiple rates offer a greater opportunityto fit tha VAT to various social and political ends. However, rate differentiationraises administrativeand compliancecosts which underminesthe VAT revenue performance see Tait, Fourth, the VAT revenue and revenue productivityvaries significantlyacross countries.
The minimumrevenueproductivityratio of 0. On the other end of the spectrum is Israel with the ratio of 0. The quality ". Fifth, followingCnossen , the tax base for a VAT can be broadly c!
Evidently, there is a wide diversity in the size of the VAT base across countries, but the - neral preferencetowards a broad based VAT is clear. The above facts are the averagesbased on the existingpractice of VAT. Deviationsfromn these averages and the structuresof the VAT in countriesthat use or are planningto introduce a VAT, is a subject of potentiallyfruitful research.
This is the course we take in this paper, focussing on th. VAT revenue performance. Hypotheses Models and Results In this section we present the hypothesesand modelsused to test - using regression techniques - the main determinantsof VAT revenue which are suggestedby the studies and practice of VAT, and are consistent with the data. Gillis et al , in their survey of the VAT lessons, noted that VAT has developed a worldwide reputationas a governn,ents' ' money machine", as few other single tax instrumentscan mobilizeas large revenue as a well designed and implementedVAT.
The experiencesof the 49 countries see Table 1, appendix show that, over the range of existing rates, with few exceptions, -le VAT revenue rises with the rate. However, countriesvary in their coverageof the base, particularly with regard to the treatment of services.
The negative impactof extensiveexemptionson. For instance, Kay and Davis estimate,on the b4 is of a survey of 32 countries, that the completeexemptionof all services excludesfrom the VAT base between 45 to 78 percent of a country's GDP. This, in turn, increasesthe pressure on the fiscal authoritiesto use higher rate to mriobilizea target VAT revenue from a smaller base. Also, it is evident that some countriesthat use almost identical rates experiencevery different revenue performance.
One source of different performances is often the size or the coverageof the base. We therefore define the BASE variable which captures whether a VAT is levied on all goods and services or on some subset of such comprehensivebase.
The underlying hypothesisis that the wider the base, the smaller is the number of goods and services exempted, and the larger the VAT revenue-to-GDPratio.
A simple dummy variable is used to measure differences in the size of the base. Tait pointed out that administrativeand compliancecosts rise dramaticallyas the numberof VAT rates increase. Thus rate differentiation,through higher costs, may adversely affect revenue. Furthermore, single rate is almost always revenuesuperior to multiplerates with little rate dispersion.
Therefore, when countries use more than one rate, rate dispersion tends to be substartial. Consequently,it may be that it is dispersion of rates, rather than the number of rates per se, that may adversely affect VAT revenue.
The ideal variable, for the constructionof which our data are not adequate, wouldbe the size of the base, as measureby a percent of GDP covered by the VAT base. A variabledefined in this way would make it possibleto estimatethe relative revenue contributionsof increases in VAT rates versus increases in the base through the expansionof base i.
However, results were not satisfactory. Oziereason c'J. Therefore, we postulate the followingb-cneralmodel: increasesin VAT revenue are due to increasesin VAT rates and the coverage and size of the tax base, while rate differentiationz.
The signs above the dependent variables denote the expecteddirection of influence. Due to missingobservations, mostlyon revenue, the original samnpleof 49 countrieshad to be reduced to 34 countries for full sample models, 20 countriesfor single-late country models, and 14 countries, for multiple rate models.
The choice of the year was , lirgely based on the Silvani data as quoted by Tanzi , p. The estimatedmodels are given in Table 1 below. The mos. The RATE variable dominates the results, with a coefficientof determinationof 0. For this group of countries, VAT generates, on average, 4. The estimatedVAT rate that will generate positive revenue, which can be interpreted as the minimumrate from the revenue perspective,is close to 2 percent see Figure 1 ".
For example, following some other Eastern European countries i. Figure 1 that Bulgaria's VAT has the potential to mobilize approximately8. Whietherthis revenuepotential will turn into actual revenue, however, will depend on other VAT characteristics.
In particular, two caveats should be kept in mind when making similar predictions. First, althoughthe estimatedrelationshipis fairly robust, predictionassumes that other importantcharacteristicsof Bulgaria's VAT i.
To the extent a country's proposedVAT features, for instance, larger number of exemptions and, hence, smaller base , the predictedrelationshipon the basis of the above model will overestimatethe VAT revenue potential; or, more precisely, the actual or expected revenues will be lower than the estimatedpotential.
The secondcaveat is analogousbut has to do with tax administrationcapacity: the lower this capacitythan for an average country in the samrrple, the lower will be the potential revenuesthan predictedby the model.
Nevertheless,the model provides a very rough picture of the order of magnitudewhen anticipatingrevenue potential of a new VAT. In the particular case of Bulgaria, it is probablysafe to assumethat the abovepotential will not be reached in the near future, since it takes time to make the VAT fully operational. Furthermore, it takes time to make Bulgaria's tax base and administrativecapacity more in line with the average country in the sample.
Extendingthe linear univariatemodel by includingthe base variable improves slightly the goodnessof fit by 4 percentage points , the RATE variable is still strongly significant,and the BASE coefficienthas the anticipatedpositive sign, although it is only weakly significantat 10 percent level see table 1.
This is probably the result of the inabilityof the dummyvariable to captule fully the diversity of tax bases in the sample. Full Sample of 34 Countries The regression results from the full sample of 34 countries see first column in Table 1 give i VAT rate coetficient of 0. As expected,VAT revenue as a percent of GDP rises with increases in coverage and size of the tax base: the estimatedequation shows a positive and significantoase coefficient at the 6 percent level.
The low significancecan be attributedto the inadequacyof the available data as a measure of the true base. Join Co-production practitioners network. Sign Up or Sign In. Powered by. Badges Report an Issue Terms of Service. Co-production practitioners network A network for co-production practitioners.
Blogs Forum. Co-production Email Dige. Value added tax in india pdf. Add a Comment You need to be a member of Co-production practitioners network to add comments! Free training It's educational It's fun It helps others. Your are right. Excellent explaination I learned new things in accounts Sir plz tell online accounting work I can do at my home?????
Good work!! I want to buy E- book, could you please tell me main contents of this book. If we want to deposite some rs as a advance tax. What will be entry in our books. Thank you for explaining coherently this topic. However, I have a question with regards to the Return for both Sales and Purchases. Would it be reasonable for me to make an entry like this, i.
My question is under which head of account the VAT entry can be posted? Very informative thanks for sharing about VAT. How do I treat VAT paid to the government. When the the seller failed to charge Vat on sales but paid VAT on purchases. We have returned Materials to Supplier.
How to record the Journal for Tax Credit note. Please clarify. We have returned the purchased material to supplier. In comment, you can give your feedback, reviews, ideas for improving content or ask question relating to written content. Start your studies. Before knowing the journal entries , I am again explaining VAT. VAT is value added tax. India is adopting VAT formula from western countries.
Before this, sale tax was collected. Value added tax is charged on purchase and sale. On purchase, it will be VAT input. On sale, it will be VAT Output. If you are buying or selling the Good which are under VAT, you have to keep its record. When Goods are bought and you have to pay both purchase value and VAT input or paid both, at that time, following journal entry will be passed.
Reason of this Journal Entry : We have bought the goods, it increases our current asset. Increase of asset will always debit. So, VAT input account will be Debit. If we are final consumer, we need not show the VAT Input account, its cost will be included in purchase account. So, purchase expense will increase and debit in our journal entry.
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