VAT in the Gulf Cooperation Council
Edited by Ehtisham Ahmad and Abdulrazak Al Faris
Chapter 4: The Design of a VAT for Multi-Government Jurisdictions: Lessons from Canada
4. The design of a VAT for multigovernment jurisdictions: lessons from Canada Robin Boadway INTRODUCTION A Countries are increasingly adopting a broad-based value added tax (VAT) as a major component of their revenue mix. There are good reasons for this. The VAT is an efficient source of revenue that induces compliance by taxpayers because of the paper trail left by its invoicing and crediting approach. Its use reduces the rates that would otherwise have to apply to other broad tax bases, such as the income tax, and brings into the tax net agents who might otherwise escape taxation because of income concealment or evasion. Its most important trait is that it leads to production efficiency by ensuring that all producers, at least those producers who are registered to pay the tax, face the same effective prices on their inputs. For this reason, the VAT has been advocated by the International Monetary Fund and other international agencies for developing countries as an alternative to trade taxes on which they have traditionally relied because of its ease of administrative implementation.1 While the VAT by itself does not address equity concerns, complementary measures can be undertaken that do so. For example, redistributive objectives can be achieved by other policy instruments, such as refundable tax credits for low-income persons, progressivity of the income tax, wealth and wealth transfer taxes, and, especially, in-kind transfers targeted to the needy. VATs are typically implemented using the credit-and-invoice method. The basics of this method are straightforward. All sales...
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