Friday, September 6, 2013

GST And Tax Evasion

One of the main advantages of a GST/VAT system, at least from the point of view of the tax collector, is that it provides an incentive for businesses to comply. The ability to claim offsets against GST/VAT paid on inputs (which businesses have to pay for anyway), brings them into the tax collection net. That widens the scope of coverage and increases the number of goods and services that are taxed. Higher compliance = higher tax yield, relative to alternatives such as Malaysia’s existing single-stage sales and service taxes (SST).

I’m not going to discuss what this does to consumers and prices.

The other advantage here is that in theory, due to higher compliance, the probability of tax evasion (though not necessarily fraud) should fall. This is especially important for developing countries, as the size of the economy outside the formal sector is much larger and the capability of tax authorities to audit transactions is comparatively poorer.

This NBER working paper outlines an experiment to see if GST/VAT does indeed reduce tax evasion in the real world (abstract):

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
Dina Pomeranz

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

All I can say is:

Technical Notes

Dina Pomeranz, "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax", NBER Working Paper No. 19199, July 2013


  1. GST to prevent tax fraud?September 15, 2013 at 2:57 PM

    Irwan Srigar has been quoted that GST is a must. It will collect 27 billion extra taxes.

    And yet at the same time, it is said that for the consumers the effective tax rate will be less than the current sales tax.?!

    How can you collect a bigger amount from a lesser tax? Unless of course it means GST will lessen tax fraud.

    Presumably from the above paper it will prevent the business men from tax fraud.

    Why not have trial first? Or is GST is the best way to prevent tax fraud?

    1. The main difference between GST and SST is that GST will cover more goods and services i.e. some items will be taxed that had previously not been covered under sales tax.

  2. Hishamh,

    From the many articles i have read about GST, some conclude that it is regressive. GST does not care whether you are rich or poor. Of course there is mention that essential goods will be 0% but what is not essential to one is not necessarily true for another.

    Alternative maybe base on epf members or socso members paying a minimum tax since they work, or so long they work they pay a minimum tax.

    Zuo De

    1. Zuo De,

      I can't quote the numbers because they remain confidential, but a majority (>50%) of food items captured under the consumer price index will be zero-rated.

  3. On 2015, during implantation of GST, we will pay SST plus GST because the cost of product/service will not likely to reduce and not removing SST on stock on hand. Hence, we will pay higher tax or double tax on 2015.