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Reforms in EU VAT: Lessons for the Indian GST

S Madhavan 

The previous article in this column had discussed briefly the Communication on the future of VAT in the EU (‘Communication’), recently adopted by the European Commission (‘EC’), and the need for India to closely follow these developments so as to seek incorporate the best in class thinking while approaching the dual GST. This article and the next one will discuss in detail the priority areas for further action, keeping in mind the overriding objectives of the reform process.

Before we turn to the Communication however, it is important to note that the EC had, earlier in April 2011, adopted the Single Market Act [COM (2011) 206] (‘SMA’) as part of the overall strategy for attaining sustainable and inclusive growth (Europe 2020). Amongst the twelve levers identified to boost growth and strengthen confidence in the EU common market, the establishment of a definitive VAT regime applicable to cross-border transactions was high on the agenda of the policymakers in the EU.

Coming now to the priority areas for further work, the Communication has grouped these under the following four headings: 

  • Work related to a simpler VAT system
  • Work related to a more efficient VAT system 
  • Work related toward a more robust and fraud free VAT system and 
  • Work on a VAT system tailored to a single market.

On the first grouping above, of a simpler VAT system, the EU takes note of the fact that divergent practices in the EU member states have led to a frustrating burden on businesses. An economic evaluation done by the EU reveals that compliance costs for businesses are very high, with estimates ranging from 2 % to as much as 8 % of the VAT collections. Furthermore, businesses carrying out intra-EU trade are subjected to additional burden of reporting. Moreover, the smaller businesses are burdened over and above their capacity to handle compliance. The EU hence recommends three areas of work in this grouping as follows:

  • The One Stop Shop (OSS) solution for simplifying the regulatory and administrative environment under which the businesses, particularly the smaller ones, operate. The introduction of a mini OSS, as it is called, by 2015, is seen as a high priority.
  • Improving the governance of VAT at the EU level, as opposed to the member state level. The EU states that stake holders want greater involvement and more transparency in the process of establishing and interpreting EU VAT law, a claim which the EC believes to be very valid. In 2012, the EC will publish guidelines on VAT legislation and will follow it up with explanatory notes on the new legislation before it is notified to be effective, giving businesses enough time to adopt to new VAT legislation. Also in the course of 2012, the EC has proposed to set up a tripartite EU VAT Forum consisting of representatives from the EC, Member States and various stake holders to exchange views on practical issues of VAT administration, especially the cross-border issues that businesses face in the EU. 
  • The last area of work relates to standardising VAT obligations, so as to minimise reporting obligations and costs of compliance. The EU proposes to standardise a VAT declaration by 2013, to be available in all languages and to be applicable to obligations such as registration, invoicing and others.

    On the second grouping, of a more efficient VAT system, the following areas of work have been identified: 


  • Broadening the tax base 
    This workstream will focus on public bodies and the need for exemptions relative thereto, passenger transport services and the need for the exemptions or the particular place of supply rules relative thereto as also on other exemptions and their continued relevance, if any. 
  • Review of the VAT rate structure 
    This critical workstream will focus on the need for reduced rates. The EU notes that reduced rates increase complexity and reduce growth in trade. The application of standard rates remains the basic principle and the need for fiscal consolidation in member states also necessitates limiting the use of such rates. The EU notes also that similar goods and services should be subject to the same VAT rate and convergence between on line and physical environments also pose a challenge on aligning rates. Accordingly the Commission will, in 2012, launch an assessment of the current VAT structure. It will also establish a VAT web portal, in which clear and binding information on the list of goods and services that are not covered by the standard rates will be provided.

    The next and last article in this series will discuss the other two groupings and the work priorities relative thereto and the implications of these initiatives for the Indian GST.

    The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. . Supported by Rahul Renavikar

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    First Published: Mon, December 26 2011. 00:15 IST