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South Asian Territories Need Expanded VATs

by Mary Swire,, Hong Kong

21 January 2015

In its recent Global Economic Prospects report, published this month, the World Bank has called on countries in South Asia to broaden the scope of their consumption tax regimes, including by removing tax breaks and raising rates.

The World Bank report begins by pointing out that average deficits in the region grew by some two percent in 2013. Compared with pre-crisis levels, deficits were as much as six percent higher in some countries in 2013. The report, therefore, says that countries need to identify new revenue streams, to expand their "extremely low" tax-to-gross domestic product (GDP) ratios.

Among countries in South Asia, India has implemented the most successful reforms, mainly in the area of direct tax, owing in part to concurrent administrative reforms, the report says. However, India's revenue from consumption taxes has fallen over the past decade. The same is true in particular for Sri Lanka and Pakistan, it continues.

"Most countries in the region would also likely benefit from considering a bigger role for the value-added tax (VAT), given its inherent advantages over other forms of indirect taxes and evidence that its adoption is likely to lead to greater revenue," the report says.

"Bangladesh is currently undertaking reforms to strengthen tax legislation and administration, but the implementation of a new value-added tax regime which would replace an existing nonuniform goods and services tax (GST) – a critical element of tax reforms – has been repeatedly delayed in the face of considerable public opposition. In Bhutan, where revenues depend to a large extent on hydropower, revenue sources must be diversified for stable and increased revenue generation. Similarly, in Maldives, tax collection relies on tourism, and for sustainable tax collection, revenue sources must be diversified."

"In India, the existing GST is fragmented with rates and administration varying by state. A new GST was announced in 2008, but has missed several implementation deadlines, although there are signs of progress under the newly elected government. In particular, a constitutional amendment bill for introducing a uniform GST was tabled in the lower house of the Parliament in December 2014. If implemented, as expected in 2015, it is likely to boost revenues by reducing distortions and creating a single market for goods and services," the World Bank said.

"In Afghanistan, delays in introducing a value-added tax have contributed to declining tax revenues, alongside weak customs and tax compliance, [which have undermined] fiscal stability. In the medium term, extractive industries can make a significant contribution to revenue generation, but this requires legislative and regulatory progress to develop the sector," the report concludes.

TAGS: Pakistan | compliance | VAT rates | tax | value added tax (VAT) | tax compliance | Bhutan | India | Maldives | Sri Lanka | gross domestic product (GDP) | goods and services tax (GST) | legislation | Afghanistan | Bangladesh | tax breaks | tax reform | services | VAT goods & services classification

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