VAT coordination in India and ASEAN: Lessons from Europe and Canada

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1 VAT coordination in India and ASEAN: Lessons from Europe and Canada Sijbren Cnossen ITIC Senior Economic Advisor, Netherlands Bureau for Economic Policy Analysis, University of Pretoria Professor Emeritus, Universities of Rotterdam and Maastricht Delhi, 6 May 2015

2 Institutional VAT settings India Centre GST and State GSTs Centre GST is applicable to intrastate transactions State exports should not bear state-vat and imports should be taxed on a par with in-state goods No border controls within India ASEAN Country-specific GSTs Exports should be zero-rated and imports taxed Border controls to be retained

3 Preliminary thoughts: India and ASEAN 1. Limit number of exemptions 2. Beware of rate differentiation 3. Provide for high threshold 4. Separate VATs can co-exist in a common market (ASEAN) or a single market (India) Ø VAT reform should precede VAT coordination

4 Developments in the EU

5 Developments in the EU Destination principle preferred: taxation of imports and zero-rating of exports (BTAs) [Accepted by India and ASEAN] Origin principle distortionary and an administrative nightmare But how can BTAs be administered without border controls? [Issue in India, not among ASEAN countries] Cnossen (1983): solution is deferred payment or exporter rating (equivalent outcomes) Deferred payment: switch of BTAs from borders to books of account [possible for State-GSTs in India, can also be used in ASEAN] Alternative: exporter rating: taxation of exports and use of proceeds to finance tax credits on imports [possible for State-GSTs in India; not suitable for ASEAN] [EU Commission: exporter rating; member states: deferred payment]

6 Role of border tax adjustments (BTAs) in the EU Abolition of border controls in 1993 BTAs before 1993 (imports/exports) - goods: applied at borders by customs posts - services: implicit deferred payment system BTAs after 1993 (imports/exports) - goods: explicit deferred payment system (self-declaration) - services: implicit deferred payment system, but explicit from 2010 (self-declaration) Comments Ø Ø Deferred payment = reverse charging = postponed accounting Place of supply rules for goods and services important

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10 Summary of EU situation Destination principle for goods & services sold to other member states, but origin principle for cross-border consumer purchases Special rules for mail order sales, cars and pleasure boats, and purchases by exempt entities Note: excisable goods are shipped in-bond throughout EU, so they can be taxed in country of consumer sale

11 VAT Information Exchange System (VIES) Lack of border controls is made up by VIES: businesses making supplies to or buying from other member states have to file monthly reports which can be cross-checked by VAT administrations (mismatches) Businesses have to obtain VAT-registration numbers from VAT agencies Introduced for goods in 1993 and for services in 2010 Initially heavy administrative burden on cross-border trade Ø VIES in Canada and India performed by federal and central VAT

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13 Proposal for exporter rating: viable integrated VAT (VIVAT) EU-wide uniform VAT rate on all intermediate transactions, supplemented by state-specific retail sales taxes; clearing in line with consumption statistics Comments Ø traders have to make onerous distinction between intermediate and retail sales Ø implications of differentiated rates by product or rate lock-in issues not considered Ø In EU exporter rating implies that excess exporting states have to collect 30+ billion for excess importing states (10% of EU-wide VAT receipts) Ø Exporter rating greatly increases administrative and compliance costs: mismatches 80 billion in EU Ø Exporter rating does not solve shadow economy and suppression fraud Ø Exporter rating does nothing to repair break in the VAT-audit trail, broadly defined

14 Dual VAT (D-VAT) [Canada] Federal GST administered by federal government Concurrent state and revenue-raising central VAT administered by provincial government (Quebec) Provincial VAT (HST) administered by federal government Retail sales tax (RST) administered by provinces Province without sales tax (Alberta) Federal VAT used to monitor interstate transactions

15 What should ASEAN consider? Retain border controls Border VAT collection for goods or deferred payment system (preferred) Deferred payment system for services (per force) Design common place of supply rules, particularly for services No need for VAT-rate harmonization Exemptions can distort inter-country trade In due course, cross-border audit recommended

16 What should India consider? Ø Ø Ø Harmonization of Centre and State GST-bases and administrative procedures recommended Interstate transactions: choice between deferred payment system and exporter rating Deferred payment (zero-rating of interstate exports + selfreporting of interstate imports); interstate transactions monitored by Centre (=VIES) Exporter rating (interstate exports taxed, credit for tax in importing state, transfer of export VAT collections to importing state); exporters incur interest charge on export VAT Small states might consider Canadian type of HST

17 Literature Cnossen, S. (1983), Harmonization of Indirect Taxes in the EEC, in C.E. McLure, Jr. (ed.), Tax Assignment in Federal Countries, Canberra: ANU press, Keen, M. and S. Smith (1996), The Future of Value-Added Tax in the European Union, Economic Policy (October), and Keen, M. and S. Smith (1999), Viva VIVAT! International Tax and Public Finance 7/6, Cnossen, S. (2003), Is the Sixth Directive becoming an anachronism? European Taxation (December), Cnossen, S. (2010), VAT coordination in common markets and federations: Lessons from European experience, Tax Law Review 63/3, OECD (2014), International VAT Guidelines, Paris