Reference no: EM13845744

Solution- A value-added tax (VAT) or also goods and services tax (GST) is a form of consumption tax.

From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution.

The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.

Following are the advantages of VAT:

1. As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax evasion due to its catch-up effect.

2. VAT is simple to administer as compared to other indirect tax.

3. VAT is transparent and has minimum burden to consumers as it is collected in small fragments at various stages of production and distribution.

4. VAT is based on value added not on total price. So, price does not increase as a result of VAT.

5. There is mass participation of taxpayers. Tax authorities will always struggle to gain the upper hand on criminals that game the VAT to their advantage.

The monetary gains that the criminals can enjoy by abusing the VAT are a strong incentive to stay one step ahead of law enforcement. For instance, the EU is working to thwart VAT-related fraud and abuse in carbon dioxide emission permits, which are the staple of the EU cap-and-trade program.

For example, in carousel fraud, criminals set up a fake company that purchases the carbon-emitting permit from a company in another country. The fake company then quickly trades the permit to another company in its country, pockets the VAT that it collects from the company purchasing the permit, and quickly disappears with the VAT proceeds.

This scheme can use any easily moved good. The fraud involving carbon emission permits alone cost EU countries $7.4 billion over a recent 18-month span.[9] The carbon emitting permits are the latest trend in VAT fraud, but certainly not be the last. Tax evaders will quickly move on to a new scheme once authorities clamp down on this type of fraud.