Indirect taxation in 2013: VAT/GST rates are increasing

March 11, 2013

Around the world, many countries are relying more and more on indirect taxes to finance their budgets. Coupled with the ongoing economic crisis, VAT/GST rates have increased impressively in recent years as a result; at the same time, the scope of VAT has broadened in many countries.

The trend in rising VAT rates has been particularly strong in Europe, especially in the European Union (EU), where, as a result of the consistent rises, between 2008 and 2012 the average EU standard VAT rate increased from around 19.5% to more than 21% (Figure 2).

The upward rate trend in Europe continues as Cyprus, the Czech Republic, France, Finland, Italy, Poland and Slovenia have already increased rates recently or have announced increases later in 2013 and 2014.

In Asia-Pacific, the upward VAT/GST rate trend is less explicit, but still noticeable. Japan, for example, which is struggling with massive budget deficits, decided in August 2012 to increase the current VAT rate from 5% to 8% effective 1 April 2014 and to 10% effective 1 October 2015. Thailand has also announced a rise in the VAT rate from 7% to 10%, to happen by October 2014.

By contrast, VAT/GST rates in the Americas remain relatively stable. In South America, where VAT systems are widespread and have been in use for some time, rates have not changed much in recent years. One exception is in the Dominican Republic, where the rate is set to increase from 16% to 18% this year and next year.

Broader base

The scope of VAT/GST is also widening in many countries. This is being achieved through the “reclassification” of certain goods or services to apply a different rate and by removing exemptions.

Examples of countries where the scope of the zero-rate (0% rate) was reduced in 2013 include Croatia, Norway and Kenya; while in the Dominican Republic, Jamaica, and Zambia, exemptions have been removed, and in Iceland, Italy and Poland, the application of the standard rate has been widened to goods that were previously taxed at reduced rates.

The impact on business

The significance of this trend for final consumers is clear: retail prices rise. But its impact on businesses is equally important: higher VAT/GST rates increase the compliance risk.

Companies must ensure that all the increases are properly dealt with in their accounting and reporting systems, which often results in a range of IT and administrative costs. Errors frequently arise when rates change, resulting, for example, from incorrect product or tax codlings or confusion about the correct rate for supplies that span the change.

More generally, rate increases mean the amount of VAT/GST “under management” also increases, as do penalties for errors that are based on the amount of tax payable.

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

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