Indirect taxation in 2013: indirect tax systems are becoming more efficient

April 8, 2013

Applying higher rates is just one way to increase indirect tax revenues; others include broadening the tax base of an existing VAT/GST system, increasing the efficiency of the tax system or improving compliance and enforcement.

Changing law and practice

Many countries are currently in the process of refining their indirect tax systems. In developed markets, longstanding VAT systems need to adapt to the demands of a 21st century digital economy.

In emerging markets, which are experiencing economic developments at a fast pace, indirect tax systems need to adapt to keep pace. In India, for example, a new nationwide GST is ready to be implemented and only awaits agreement between the central and state governments.

The new Indian system is intended to replace almost all existing indirect taxes levied at the state and national levels, minimize exemptions and do away with the current multiplicity of taxes. Similarly, China is in the process of replacing its current business tax on services with a broader-based VAT through a series of VAT pilots.

In the end, it is intended to amalgamate all forms of China’s turnover taxes into the VAT.

In the EU, the European Commission has launched a comprehensive reform of the existing VAT system. The Commission has identified no fewer than 26 priority areas for further action in the coming years.

The aim is to move to a more modern VAT system, which should be simpler, more efficient and more robust. Significant changes can be expected in the near future, such as the adoption of a onestop-shop registration for all taxpayers’ duties or a standardized EU VAT return.

The United States (US) is still far from implementing a federal VAT. Currently, states apply their own consumption taxes, most of which are single-stage taxes on the sale of goods. But, even in the US, a trend can be seen toward states extending the scope of their current sales taxes.

While sales taxes, by definition, only apply to purchases of physical goods, it is the market in electronically supplied services (such as digital music distribution, internet downloads or telecom services), which is growing fastest. An increasing number of states are, therefore, trying to expand their current sales tax to cover electronic goods and services or are trying to create a “nexus” for out-of-state vendors to constrain sellers to collect sales taxes on remote sales.

With more than 150 countries now operating a VAT/GST system and international trade still growing, it is becoming more important than ever to provide a global framework for a consistent interaction of all these different systems. For a number of years, the OECD has been working on developing international VAT/GST guidelines, which could provide the basis for such a framework.

This initiative gained momentum following the OECD’s Global Forum on VAT, held in November 2012. The forum brought together more than 85 country delegations from all continents together with international organizations, academics and businesses to explore key policy trends and their impact for tax administrations and businesses.

Improving tax administration

Finally, governments have discovered that also on the administrative side, the efficiency of VAT/GST systems can be drastically improved — which increases tax revenues. There are many approaches taken by governments, but an important one is to create common interfaces and reduce gaps in the system. This is (among others) one reason why many governments are enforcing the use of electronic data transmission and filing.

In December 2012, we conducted a survey of Ernst & Young Indirect Tax professionals in 39 countries and asked them about indirect tax compliance requirements.

Twenty-five, of the 39 countries surveyed require VAT/GST returns to be filed electronically on a mandatory basis, 12 states have an optional electronic filing (e-filing) facility and just two countries do not offer or require e-filing (Figure 3).

The impact on business

The reason for this trend is clear: e-filing considerably eases processing of VAT/GST returns for tax administrations and makes administration faster and more efficient. In addition, having electronic data enables tax administrations to use IT-based audit tools more easily, which can help to combat fraud and evasion.

Most taxpayers can also benefit from increased efficiencies arising from e-filing, but dealing with multiple tax administrations’ different requirements and tax administrations’ increased audit capacities means that greater focus must be given to the accuracy and efficiency of indirect tax compliance processes to avoid an increased risk of incurring penalties.

Read more: Indirect tax in 2013 – A review of global indirect tax developments and issues

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