Tax Developments In Albania
Value Added Tax Developments in Albania -- By Eduart Gjokutaj
Value-added tax is a tax imposed by government at each stage in the production of a good or service. Every taxable person for VAT purposes that handles a product during its transformation from raw materials to finished goods pays the tax. The amount of the tax is determined by the amount of the value that a company adds to the materials and services it buys from other firms.
A firm's net VAT liability in Albania is usually calculated by using the credit method. According to this method, a firm determines its gross tax liability by multiplying its sales by the VAT rate. Then the firm computes its net VAT liability by subtracting VAT paid on purchases from other firms from the firm's gross VAT liability. The other firms also have to charge VAT to all their customers, including our firm and will be paying this to the government. Since we are paying this indirectly to the government through our suppliers, we don't have to pay it directly and can deduct this from our liability to the government. Most firms that pay a value-added tax try to pass this expense on to the next buyer. As a result, most of the burden of this tax in time falls on the consumer. In this sense, the final effect is equal to that of a retail sales tax.
If the VAT rate is 20%, in our example for Albania, total VAT collected should be ? 300 (20% of 1500). VAT paid to suppliers, which can be deducted, should be ? 200 (20% of 1000). So, the net VAT liability is ? 100 (300 - 200). This is the same result as in the earlier presentation. However, understanding this method is useful because it allows us to take into account multiple tax rates.
What's the best of VAT?
First, exports are cheaper under a VAT. The first thing to note from the above example is that if a country with the VAT would win because of the huge difference in price in comparison with all other similar kind of taxes. So, exports of countries like Albania get boosted because the VAT is more efficient. This results largely from the system of fixed percentage mark-ups by the intermediaries. However, even if the intermediaries were to maintain the same absolute mark-up as that of a VAT manufacturer, they would still lose out because they would need to pay a Sales tax on the sales tax. Many countries exempt exports from their consumption taxes in order to boost exports.
However, in practice it is possible only to take off the final sales tax charged by the exporter or, at the limit the penultimate sales tax paid by the exporter on his purchases. In our example, the wholesaler would not charge the final ? 64 and would claim a reimbursement of the ? 29 paid to C. All the previous sales taxes in the system cannot be calculated and reimbursed because the individual manufacturer does not know, at the time of his sale, what percentage of his sales are eventually going to be exported. This means that export prices include some sales tax (? 32 in our example). As opposed to this, the wholesaler in the VAT system is exonerated from charging the last ? 48 and claims his ? 24 VAT paid as a refund. The government therefore gets nothing from the system, and the country's exports are really tax-free (as far as this consumption tax is concerned).
Second, double taxation occurs if an input is taxed at the time of purchase and then a tax is levied on the same input again when it becomes part of the output of the firm. Consumption VAT, with the credit method of tax computation, easily excludes inputs from taxation. The exclusion of inputs from a Sales Tax (ST) would be more difficult. Usually, firms buying inputs would have to provide sellers with exemption certificates before making their purchases. It is therefore reasonable to expect that excluding inputs from taxation would be more difficult with a Sales Tax than with a VAT.
Third, is enforcement effect. With a VAT, a firm would have a financial interest in ensuring that amounts of VAT paid on input purchases are accurately reported on its purchase invoices since the firm could receive credits against its VAT liability. In addition, the VAT would provide the tax authorities with an opportunity to crosscheck the amount of VAT collected because data are gathered from producers at different stages of production. Some enforcement problems do exist with a VAT. For example, firms at different stages of production could collude to falsify invoices. But the ST lacks both the self-enforcing procedure and the crosschecking opportunity of the VAT. Hence, better compliance is expected from a VAT than with a ST.
Forth is Broadness of Tax Base. Because of the potential for better enforcement of a VAT, it may be possible to levy a VAT on more goods and services than a ST. This view is supported by the fact that VATs of European nations, on the average, are levied on more goods and services.
Fifth is Invisibility of the VAT. In Albania, all retail prices over the annual of turnover above to 5 million Leks are quoted inclusive of VAT, so that the consumer does not get a shock after deciding to buy a product based on the quoted price, especially because VAT rates tend to be considerably high, to enable the government to obtain adequate finances. But since the customer does not always make the effort to calculate the VAT that is included, the tax becomes invisible. Each invoice is required to indicate the VAT rate and VAT amount, but invoices are not obligatory for small retail sales. For Business-to-business transactions, the prices are quoted without VAT, because the customer will be able to offset the VAT: in fact it is just an advance VAT being paid to the supplier instead of later to the government.
VAT as stimulus for employment
Since 1996, in Albania a new experiment was tried. Lower VAT was allowed on certain labor intensive industries for two reasons: the first is to encourage employment; the other is to reduce tax fraud. With high VAT rates since 1998, consumers pay cash without bills, and the State loses not only the VAT but also the income tax and social security on the workman's income. Even the government has issued some incentives about the employment tax rate, the hidden gray employment isn't changed for better. The best way to stimulate employment is to solve the problem of tax evasion and fraudulent activities.
Article source: ezinearticles.com
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