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.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.