CONSUMPTION TAX : THEORY AND PRACTICE

Abstract

In the last decade, many countries have moved away from direct income taxation towards indirect consumption taxation. The indirect broad-based consumption tax (BBCT) may take many different forms. However, most economists agree that the best indirect BBCT are the retail sales tax (RST) and the value-added tax (VAT). This Academic Exercise focuses on these two types of indirect BBCT but more emphasis is placed on the VAT. The spread of the VAT has probably been the most striking development in the tax world in the past two decades. Although the RST has its relative merits, it seems to be less robust than the VAT. The Academic Exercise also ·analyses the empirical experiences of nine selected economies. Among the six East Asian economies chosen, only Malaysia does not impose a VAT but it has a general sales tax. The VAT has been successfully implemented in South Korea. Taiwan and Indonesia. Their success has been largely attributed to the comprehensive preparation and planning before the VAT was introduced. The implementation problems faced by the Philippines were mainly caused by inadequate preparation. Thailand has recently joined these economies when it imposed the VAT on 1 January 1992. Three OECD countries are also chosen for this study. New Zealand is studied primarily for the comprehensive nature of its VAT (known as GST). The GST is probably the least distorting among all the VATs in the world as a result of the comprehensive coverage of the tax, with virtually no exemptions. The problems which Japan faced with VAT reform provide an invaluable lesson, especially for countries which do not impose general sales tax but intend to adopt some form of a broad-based consumption tax. The experience of the United States with the RST (at State and local level only) is extremely important since it is one of the two OECD countries which still impose a RST (the other country is Switzerland -- which also imposes WST in certain cases). Canada used to impose a RST (at the provincial level) and a manufacturers' sales tax (at the federal level) but switched to a federal VAT on 1 January 1991. At present, a genaral sales tax does not exist in Singapore. Indirect sales taxes has been in the form of selective excises. Mckinnon 's proposal for a VAT in Singapore in 1966 to promote export expansion was not accepted for implementation. However, the recent years, the Singapore government has indicated its intention to implement a BBCT in the near future. The recent proposal for a BBCT stems from the need for Singapore to remain internationally competitive. However, social desirability makes it necessary for the regressive impact of the tax to be mitigated to ensure political acceptabilty of the tax. This trade-off between economic efficiency and vertical equity has been a controversial and conflicting issue in many tax debates. With the aid of theory and the experience of the seven countries with the VAT, the case for a VAT in Singapore is evaluated. Singapore's unique characteristics help in identifying some of the potential problems likely to be faced with VAT implementation. Some possible remedial measures to mitigate the severity of these problems are then recommended.