The High Costs of Controlling Gst and Vat Evasion

Abstract

Canada's goods and services tax (GST) is sometimes said to be self-enforcing - vendors will always charge the tax because purchasers will always want to claim input tax credits. Nonetheless, GST evasion is a reality. Solutions to the problem usually involve increased audits (and therefore increased compliance costs) for taxpayers and increased administration costs for governments; those costs represent a diversion of resources from more productive activities and an economic loss to the country. The GST is a value-added tax (VAT). Other countries that impose a VAT face similar problems and have proposed various solutions. Northern Cyprus and Bolivia, for example, refund some of the VAT paid on the purchases for which final consumers have obtained official receipts from sellers. In this article, the authors measure the compliance costs to taxpayers and the administration costs to the tax authorities in those two countries. Although similar schemes are not likely to be directly copied in Canada, the authors provide data to show how high compliance and administration costs can go when governments single-mindedly pursue the goal of controlling VAT evasion. The total VAT compliance and administration costs incurred by Northern Cyprus (in 2003) and Bolivia (in 2002) are estimated at, respectively, 1.50 and 1.55 times the total budgetary expenditures to administer the entire domestic tax system. In both countries, the compliance and administration costs of the VAT refund schemes amounted to more than the 5 percent of the total revenues collected by the VAT systems.

Keywords: VAT, GST, compliance, refunds, evasion, cost