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Sunday, July 10, 2011

Advantages & Disadvantages of Value Added Tax (VAT)

Advantages:

Fairness and equality: everybody who buy certain products or services need to pay the same tax. If they spend more on those products or services, they pay more on VAT.

Extravagant alleviation: when there is high VAT on luxury products or service, people will try to buy in order to fulfill their needs only, so it is the benefits for economics.

Revenue Security: the government can get more revenue from VAT and sometimes use VAT instead of tariff to get more money. Furthermore, VAT can help the government to reduce tax evasion in the country.

Disadvantages:

VAT is regressive: As this tax was imposed on the products in the market, it put more burdens disproportionately on the poor rather than the rich because the poor need to spend more of their income if compare with the rich’s expense of their income.

VAT can’t not be used for progressive tax rate that high earners need to pay high VAT rate and low earners need to pay less. Therefore, it is very messy if VAT is set low rate to basic products and high rate to the luxury products.

VAT is inflationary: when VAT is imposed on the market, it gives the opportunity for the sellers to increase the price and the price of products or services will go higher that affect negatively to the cost of living.

By: POK Panhavuth

DynamicCambodia