If retailers do evade, tax will be lost only on their margins because customers that areregistered firms gain nothing if their suppliers fail to collect tax, except delay in payment;they will pay more to the government themselves. Under other forms of sales tax, bothseller and customer gain by evading tax. One particular advantage is that of the wideningof the tax base by bringing all transactions into the tax net. Specifically, VAT gives thenew government the opportunity to bring back into the tax system all those persons andentities who were given tax exemptions in one form or another by the previous regime.
2) Revenue security
VAT represents an important instrument against tax evasion and is superior to a businesstax or a sales tax from the point of view of revenue security for three reasons.In the first place, under VAT it is only buyers at the final stage who have an interest inundervaluing their purchases, since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases. Therefore, tax losses due toundervaluation should be limited to the value added at the last stage. Under a retail salestax, on the other hand, retailer and consumer have a mutual interest in underdeclaring theactual purchase price.Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, thegovernment will at least have collected the VAT paid at stages previous to that at whichthe tax was avoided; while if evasion takes place at the final stage the state will lose onlythe tax on the value added at that point.If evasion takes place under a sales tax, on the other hand, all the taxes due on the productare lost to the government.A significant advantage of the value added form in any country is the cross-audit feature.Tax charged by one firm is reported as a deduction by the firms buying from it. Only onthe final sale to the consumer is there no possibility of cross audit.Cross audit is possible with any form of sales tax, but the tax-credit feature emphasisesand simplifies it and is likely to make firms more careful not to evade because they knowof the possibility of cross check.
VAT may be selectively applied to specific goods or business entities. We have alreadyaddressed essential goods and small business. In addition the VAT does not burdencapital goods because the consumption-type VAT provides a full credit for the taxincluded in purchases of capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates the tax that has been imposed on them.
4) Co-ordination of VAT with direct taxation
Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate