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?

  • $\begingroup$ Why do you think there is a self policing incentive for VAT and what is GST? Please go into much more detail. (Otherwise these seem like questions copied from a textbook.) $\endgroup$ – Giskard Jul 21 '16 at 12:35
  • $\begingroup$ @denesp I think my question is more clear now.I was not asking about textbook definitions of GST and VAT $\endgroup$ – user6479280 Jul 21 '16 at 16:22
  • $\begingroup$ Unfortunately I still do not know what GST is or what the source of your claim is. $\endgroup$ – Giskard Jul 21 '16 at 18:47
  • $\begingroup$ @denesp By GST I meant a uniform Goods and Services Tax throughout a country.While exploring its pros and cons I came across this concept $\endgroup$ – user6479280 Jul 22 '16 at 20:37
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    $\begingroup$ Would you please link to where you came across said concept so that we may share the joy of exploration? Also, perhaps editthe definition of GST into the body of the question, so that a would be answerer does not have to read this discussion. $\endgroup$ – Giskard Jul 22 '16 at 23:52

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.

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  • $\begingroup$ So in GST only the final supplier charges and collects VAT? $\endgroup$ – Giskard Aug 7 '16 at 9:59
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    $\begingroup$ Not VAT per se, but sales tax. Under the GST regime only the final seller collects the tax on sold goods and services. VAT has a cascading tax regime that taxes value added at every level in the supply chain. $\endgroup$ – The Kaykay Aug 7 '16 at 10:03

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