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Criticisms on VAT

Published on: Tue, 2013-12-31 10:02

Criticisms on VAT 

we know the rationales behind replacing sales tax with VAT. By then we touched up on some advantages of introducing VAT in certain tax system of state( It enhances exports, It promotes capital investment and saving, It improves productivity, It is neutral,  It has less tax burden, It reduces the possibility of tax evasion, It is a more comprehensive and equitable tax system, It avoids cascading effect of a tax ( Tax on Tax ) and so on. But, VAT is not only with advantage scholars raise strong critics against having VAT in a state. Some of the critics are:

a. It is regressive in nature

A straightforward single rate VAT with few exemption would tax lower income groups ( the poor ) more heavily than the higher income groups (the rich ). It is, thus , incongruent with the basic principles of taxation which state that a person should be taxed according to his ability-to-pay. This makes VAT regressive tax system. In order to compensate for its regressive effect, a number of countries have exempted basic goods particularly food items from VAT.

b. It requires advanced economic structure.

The proper implementation of VAT system requires organized and advanced financial and economic structure as it is complicated system. VAT system also requires proper record keeping of invoices at each stage of production and sale by both the seller and buyer. Hence, it becomes difficult to implement the system in all types of economy.

c. It puts additional burden to tax authority

In VAT system, the manufactures, wholesalers and retailers have to fulfill various legal formalities in the form of maintaining various records, accounts, books, etc. the verification of those formalities puts additional burden to the tax enforcing authorities. 

d. It is uneconomical

VAT system involves high cost of administration, assessment, verification, collection, etc. hence, it is highly uneconomical.

e. It has ream loopholes for tax evasion

Although VAT system requires proper record keeping of invoices at each stage of production and distribution by both the buyer and seller, it has ream loopholes for tax evasion. This may include the following:

  • Taxpayers could over report sales of zero rated goods;
  • Taxpayers could use invoices they received for personal purchase to claim tax credit;
  • It enables buyers and sellers to strike secret deals with regards the issuance of receipts;
  • It could lead to the formation of forged companies receipts to claim tax  credit on input VAT, etc.


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