Reliance on indirect tax… Pressure now on tax administrators

Around the world, many countries are relying more on indirect taxes to finance their budgets. Reports have shown that indirect tax systems are becoming more efficient.

For instance, emerging market countries are reforming their indirect taxes to improve administration and to adopt Value Added Tax (VAT), or Goods and Services Tax (GST) systems that are more in line with global models.

Having identified key trends in indirect taxation that is believed will be significant for international businesses in 2013 and beyond, experts believe that this trend would further place more pressure on tax administrations.

Nigeria is among countries across the globe that are most affected by trends around VAT, Excise and other indirect taxes, according to a report titled “Global indirect tax developments: the shift in 2013,” by Ernst & Young.

For instance, snapshot of VAT/GST rate changes indicated that in Nigeria, effective from January 1, 2013, a zero-rate VAT applies to imports of commercial aircraft and aircraft spare parts, and to imports of machinery and equipment used in the solid mineral sector.

Also, effective January 1, 2013, levies of 50 percent and 60 percent apply to imported raw sugar and refined sugar, respectively; and a levy of 100 percent applies to imported brown and polished rice. These measures are expected to take effect, subject to the administrative and legislative processes required for the amendment to be passed into law, while the later being enacted into law.

The report notes that the significance of this trend for final consumers is clear: retail prices rise. But its impact on businesses is equally important: higher VAT/GST rates increase the compliance risk.

Companies must ensure that all the increases are properly dealt with in their accounting and reporting systems, which often results in a range of IT and administrative costs.

Errors frequently arise when rates change, resulting, for example, from incorrect product or tax codings or confusion about the correct rate for supplies that span the change.

By implication, tax administrations are focusing on compliance and enforcement. “The growing importance of indirect taxes to governments places more pressure on tax administrations to enforce compliance. This focus is leading to greater scrutiny of taxpayers’ affairs through more frequent and more effective tax audits and greater consequences for errors,” the report notes further.

“Value Added Tax (VAT), or Goods and Services Tax (GST) rates are increasing. Coupled with the ongoing economic crisis, VAT/GST rates have increased impressively in recent years as a result; at the same time, the scope of VAT has broadened in many countries. Higher VAT rates increase risk as companies must manage greater amounts effectively in their accounts. The consequence of making errors also increases, as penalties for errors are a percentage of the underpaid tax,” it notes.

“Also, excise duties are on the rise again. The percentage of government revenues received from excise duties has seen a constant decline over recent years. However, this development has slowed down and we might see a turn in the opposite direction as excise rates are rising and new duties are being introduced – especially in connection with energy, the environment and public health. Free trade is increasing, but is meeting protectionist challenges.

“Customs duties were once a primary source of revenue for most countries. But continuously growing global trade and the efforts of organisations such as the World Trade Organisation (WTO) have led to a constant reduction in customs duties around the world. This trend continues around the world as countries continue to conclude a growing network of various kinds of trade agreements. However, as the downturn continues many countries are turning to protectionist measures where they can,” the Ernst & Young report states.

 

IHEANYI NWACHUKWU