State the benefits of value added tax (VAT) in the context of the principles of a good tax system

Benefits of VAT in the context of a good tax system

  • VAT is usually collected by the government through VAT registered traders. The government does not pay the traders to collect VAT on its behalf. Given the wide scope of VAT, each and every person in the economy is affected. The government is able to reach every person who suffers VAT though a relatively small proportion of the entire population that comprises VAT traders.
  • VAT is equitable the overall liability is determined by a person‟s expenditure/consumption. Those with a higher expenditure (and therefore more able to pay tax) end up contributing similarly high proportion of VAT collected.
  • VAT is also equitable where it does not apply, (either through zero rating or exemption) to basic necessities such as foods, medicine, healthcare, agricultural inputs, education, etc.
    Lower income groups spend a high proportion of their incomes on such goods. Consequently, only a small proportion of their expenditure is affected by VAT.
  • VAT is based on consumption in the domestic economy. Its wide scope where accompanied by little leakage results in high revenue yields.
  • VAT is an indirect tax. It is based on a person’s expenditure and not income. This minimizes the disincentives associated with direct taxation. Its indirect nature means most people who suffer VAT may not know about it or may not be able to quantify how much is paid. For this reason there is less likelihood of resentment. Resentment of taxation usually leads to high tax evasion.
  • The wide scope of VAT accompanied with minimal expenditure does not distort the working of the market mechanism. In other words, VAT ensures neutrality as consumers in the economy cannot switch their preferences/consumption to avoid taxation.
Share through

Leave a Reply

Your email address will not be published. Required fields are marked *