Amongst several advantages of GST (Goods and Services Tax) I read one as that it prevents tax evasion through self policing incentive. But self policing incentive is already provided in VAT (Value Added Tax). So what's new in GST that improves the current self policing incentive system?
Self-policing incentive, in theory, works similarly for both Value Added Tax (VAT) and Goods and Services Tax (GST). The improvement, however, could come from the reduction in the number of instances where suppliers can circumvent the self-policing system, to evade taxes.
VAT is collected by every supplier in the supply chain and paid by every buyer in that supply chain. At every incidence of tax there is an opportunity for tax fraud. One example of VAT fraud is: the supplier provides an invalid VAT number on the invoice and collects the appropriate amount of VAT from the buyer and instead of transferring the collected tax to the government, the supplier pockets it. Of course, such fraud can be detected by the customs department and when audited the supplier may claim that there was a printing error in the VAT number on the invoice. But if suppliers are not audited (perhaps because the cost outweighs the benefit) then they can plausibly pocket all the tax they collected from the buyer. It is also plausible that such a fraud can be carried out by many suppliers, if not every supplier, in the supply chain. Hence, even though there is self-policing mechanism fraud can still be committed by one or more suppliers in the supply chain under the VAT regime. In contrast, under the GST regime there is only one supplier in the supply chain who can theoretically commit that tax fraud. Since there are less instances under GST to evade taxes it is plausible that the amount evaded will be less and that it would be easier to audit.
If your allusion is to tax evasion… Unlike the value added tax, a sales tax is imposed only at the retail level(at the time of sale). If goods are sold at retail more than once (used items, cars etc) the sales tax can be charged on the same item indefinitely.
These 2 ‘systems’ of indirect taxes are quite similar (as without taxation states and some entities would not make profit HAHA), the main difference is VAT (like known in European countries) is collected at the same level rate for certain product or service in one country, but with GST is collected depending on the region, ZIP code etc so it can happen that in NY (even Brooklyner can pay for 1%more than people from Brox...but usually it varies from rougly 3 to 7%) citizens pay more sales tax than in LA, as vary by state, there is no unified national sales tax, but at least more sophisticated dispute system and more customer protection you can find in US. For VAT there are carried out audits to prevent frauds. Nobody would risk to not claim the correct accounting procedures and credit notes, invoices and transactions to authorities. In GST only the final seller collect the tax on goods and services (only one entitity involved), whereas in VAT regime there come into play all the participants in supply chain. The tax is levied on a value which includes tax paid by the previous buyer (tax on tax levied on a product)is more accurate for VAT or so called cascade effect. And one of the major issues with GST is the removal of this tax on tax effect.