Question

State the advantages and disadvantages of value added tax to both taxpayers and to the tax authority.

Answer 1

Advantages:

1. Tax Authorities:

a) VAT (valued added tax) significantly reduces the chances of tax evasion.

b) It is very easy to control and administer in comparision to other indirect taxes.

c) It is a good source of revenue for the tax authorities.

2. Taxpayers:

a) The biggest advantage of VAT is that it is transparent and imposes minimum burden on the customers.

b) VAT, as it name suggests is added on the "value added" rather than the price and hence it does not result in a increase in the price of product.

Disadvantages:

1. Tax Authorities:

a) It is regressive in nature. Rich and poor both pay this tax at the same percentage.

b) The paperwork involved in VAT is much more complex than any other indirect tax since VAT is imposed at each and every stage including production, distribution, sale etc.

2. Taxpayers:

a) For a small company VAT will be very costly since it is based on a fully functional billing system.

b) VAT is also very hard to understand since it is imposed on multiple stages.

c) One of the biggest disadvantages of VAT is that it requires the taxpayer to maintain a proper record of sales and purchases which becomes very difficult for taxpayers with huge number of transactions during the year.