Within taxes on goods and services, a distinction is usually made between general and selective taxes, depending upon the range of goods and services included in the statutory base. Sales, turnover, or value-added taxes are general, as the tax base is typically defined to include all commodities for sale other than those specifically exempted. On the other hand, excises on tobacco, alcoholic beverages, petroleum products, and levies on specified services, or motor vehicle taxes are selective, as the taxable commodities are individually enumerated in the law. General taxes on goods and services are often referred to as sales taxes, while all selective taxes may be considered part of excise systems.
Sales taxes may be levied at virtually all stages of production and distribution, as turnover and value-added taxes, or may be limited to specified stages as in manufacturers’, wholesale, and retail taxes; occasionally various hybrid forms are also used. But the repeated application of a sales tax whenever taxable goods change hands means that the tax discriminates between integrated versus non-integrated forms of business and between self-production versus subcontracting methods of doing business, while the resulting cumulative, or “cascade” effects, may lead to price distortions. Various techniques have been designed to mitigate or eliminate these effects. Table 1 lists the different forms of sales taxation found around the world in the order in which each tax discriminates less than its predecessors among forms of economic organization. This also happens to be the order of their approximate historical appearance.
|1. Turnover taxes collected on sales at all or nearly all production and distribution stages; on account of their cumulative effects these taxes are also referred to as cascade taxes.|
|2. Production taxes collected on sales by producers to wholesalers, retailers, or other producers; transactions prior to the sale by the last producer are often partially exempted or taxed at reduced rates:|
|a. French-type production taxes exempt domestically produced raw materials and intermediate goods as well as imported goods that have not been further processed;|
|b. other production taxes exempt producer goods or apply reduced rates, while trading activities per se are excluded from the tax.|
|3. Dual-stage taxes (tandem systems) such as manufacturers’/retail taxes collected on both the sales of finished products of manufacturers to wholesalers or retailers, and on sales from retailers to final consumers.|
|4. Manufacturers’ taxes collected on sales of finished products of manufacturers to wholesalers or retailers, including occasional direct sales to consumers. While capital goods are usually exempted outright, various techniques have been designed to counter the cumulative effects of the taxation of raw materials and intermediate goods:|
|a. the suspension method permits the tax-free purchase of inputs by traders and manufacturers registered for that purpose, tax being levied when products leave the “ring” and are sold to unregistered persons;|
|b. the subtraction technique allows for a deduction of taxable purchases from taxable sales; this can be done for|
|(i) physically incorporated inputs only; or on|
|(ii) some other basis such as a deduction for inputs taxed at the same rate as the finished product;|
|c. the tax credit principle provides for a credit for tax paid on purchases against tax payable on sales.|
|5. Wholesale taxes collected on sales by the last wholesaler or manufacturer to retailers, including occasional direct sales to consumers. Capital goods are usually exempted outright, while the suspension method applies to raw materials and intermediate goods.|
|6. Retail/wholesale taxes (hybrid systems) collected on the sales of retailers to final consumers and of wholesalers or manufacturers to retailers whose operations are considered too small for separate taxation. Producer goods are treated similarly as under wholesale taxes.|
|7. Retail taxes collected on sales by retailers to final consumers, including wholesalers or manufacturers selling occasionally to consumers; producer goods are generally excluded by definition.|
|8. Value-added taxes collected on sales at all or nearly all production and distribution stages, with each stage receiving a credit for tax paid on purchases from the preceding stage:|
|a. the EEC model extends through the retail stage and provides for a credit for tax paid on all producer goods;|
|b. other types may not cover the retail stage and sometimes do not give credit for tax paid on certain fixed assets.|
Excise systems, which are much more diverse and have fewer conceptual characteristics, are more difficult to classify than sales taxes. However, as Table 2 shows, a useful distinction can be made, on the basis of the number of goods and services covered, between limited, intermediate, and extended excise systems. Cascading generally poses less of a problem than with sales taxes, as most excise systems comprise mainly single-stage taxes levied on items for direct consumption.
|1. Limited excise systems comprise at least the traditional excise goods: tobacco products, alcoholic beverages, petroleum products as well as motor vehicles and various forms of entertainment. In addition, some food products such as sugar, salt, soft drinks and, for instance, matches, cement, or insurance may be included. However, all in all, the coverage of limited systems would not exceed 10 to 15 commodity groups with closely related products (various petroleum products, or sugar and saccharine, for instance) being treated as one excisable item.|
|2. Intermediate excise systems consist of between 15 and 30 commodity groups. In addition to the items covered under limited systems, they include more food products such as various dairy and grain products. Other items of widespread consumption, such as textiles, footwear, and pharmaceuticals, may also be covered, as well as a few luxury items, for instance, cosmetics and perfumes. The producer goods that may be part of intermediate systems are cement, building materials, paints, and varnishes. As a rule, a number of services such as insurance, banking, transportation, and public utilities are taxed.|
|3. Extended excise systems comprise more than 30 commodity groups spanning almost the whole range of production activities in a particular country. In addition to the items taxed under intermediate systems, many luxury and producer goods are excisable. Invariably, high excises are imposed on electrical and gas-operated appliances, radios, television sets, and musical and photographic equipment. Extended systems are the only excise systems that cover a wide range of producer goods: steel and aluminum products, plastics and resins, rubber products, wood products, and sometimes machinery.|
On the basis of the classification developed above, the sales tax and excise systems of 124 countries are shown in Table 3 on a regional basis. Sales tax rates, computed as a percentage of the tax-exclusive value of taxable sales, are also given. These are the standard rates; in most countries essential goods are either exempted or taxed at a lower rate, while higher rates apply to luxury items.
|Country||Nature of sales tax||Standard sales tax rate (tax-exclusive)||Excise coverage||Sales tax||Total||Traditional excise goods|
|Northland West Africa|
|Gambia, The||No sales tax||—||Limited||—||…||(…)|
|Liberia||No sales tax||—||Limited||—||7||(5)*|
|Libyan Arab Rep.||No sales tax||—||Limited||—||…||(…)|
|Nigeria||No sales tax||—||Extended||—||14||(6)|
|Sierra Leone||No sales tax||—||Intermediate||—||26||(24)|
|Central African Rep.||Production4||11.7||Intermediate7||…||…||(…)|
|Equatorial Guinea||Turnover||3||No excises||…||—||(—)|
|Rwanda||No sales tax||—||Limited||—||…||(…)|
|Eastern and Southern Africa|
|Botswana||No sales tax||—||Limited||—||…||(…)|
|Lesotho||No sales tax||..||Limited||—||…||(…)|
|Malagasy Rep,||Value-added||13.6||Limited||20||18||(18) *|
|Malawi||No sales tax||—||Limited||—||…||(…)|
|Mauritius||No sales tax||—||Limited||—||37||(31)|
|Somalia||No sales tax||—||Intermediate7||—||31||(13)*|
|Sudan||No sates tax||—||Extended7||—||…||(…)|
|Swaziland||No sales lax||—||Limited||—||…||(…)|
|Zambia||No sales tax||—||Limited||—||10||(10)*|
|Afghanistan||No sales tax||—||Limited||—||…||(…)|
|Bahrain||No sales tax||—||No excises||—||—||(—)|
|Egypt||No sales tax||—||Extended7||—||…||(…)|
|Iran||No sales tax||—||Intermediate||—||10||(8)|
|Iraq||No sales tax||—||Inter mediate||—||…||(…)|
|Jordan||No sales tax||—||Extended7||—||…||(…)|
|Kuwait||No Sales tax||—||No excises||—||—||(—)|
|Lebanon||No sales tax||—||Limited||—||23||(19)|
|Oman||No sales tax||—||No excises||—||—||(—)|
|Qatar||No sales tax||—||No excises||—||—||(—)|
|Saudi Arabia||No sales tax||—||No excises||—||—||(—)|
|Syrian Arab Rap.||No sales tax||—||Intermediate||—||18||(10)|
|Yemen Arab Rep.||No sales tax||—||Limited||—||…||(…)|
|Yemen. P.D.R.||No sales tax||—||Limited||—||…||(…)|
|South Asia, Far East|
|China, Rep, of||Turnover||2||Extended 7||6||42||(21)|
|Japan||No sales tax||—||Extended 7||—||26||(17)|
|Country||Nature of sales tax||Standard sales tax rate (tax-exclusive)||Excise coverage||Sales tax||Total||Traditional excise goods|
|Singapore||No sales tax||—||Limited||—||40||(24)|
|Caribbean, Central America|
|Bahamas||No sales tax||—||Limited||—||…||(…)|
|Barbados||No sales tax||—||Extended7||—||19||(14)|
|Costa Rica||Retail wholesale||5||Extended7||15||23||(17)|
|Dominican Rep.||No sales tax||—||Limited||—||29||(20)*|
|El Salvador||No sales tax||—||Intermediate||—||28||(21)|
|Guatemala||No sales tax||—||Limited||—||28||(23)|
|Haiti||No sales tax||—||Extended||…||…||(…)|
|Jamaica||No sales tax||—||Extended7||—||28||(19)|
|Panama||No sales tax||—||Limited||—||28||(16)|
|Trinidad and Tobago||No sales tax||—||Extended’||—||22||(9)*|
|Guyana||No sales tax||—||Extended 7||—||…||(…)|
|Venezuela||No sales tax||—||Limited||—||8||(7)|
|North America, Australasia|
|Fiji||No sales tax||—||Limited||—||…||(…)|
|Western Samoa||No sales tax||—||No excises||—||—||(—)|
|European Economic Community|
|Rep. af||Value-added||11||Inter media la||22||21||(16)|
|Cyprus||No sales tax||—||Limited||—||37||(24)|
|Malta||No sales tax||—||Limited||—||…||(…)|
The most favored form of sales taxation, particularly in Africa, is that collected at the manufacturing stage—the manufacturers’ sales tax. Twenty-five countries, 30 per cent of all those employing sales taxes, use this form. It is probably the easiest variant to administer in developing countries, being collected at a level where the number of taxpayers is smallest and record keeping best; the close relationship with previously imposed production excises and the corresponding duties collectible at the import stage are other administrative advantages. To some extent this is also true of production taxes used in 12 of the countries listed, 7 of which were formerly associated with France. The value-added tax, which is one of the least discriminatory forms of sales taxation and is particularly suitable for joint use in a common market, has rapidly gained ground in recent years. It is now used in 13 industrial countries, 12 of which have adopted the EEC model (defined in Table 1), and in 7 developing countries. Regarding other forms of sales taxation, 5 countries have wholesale taxes, 3 retail taxes, 6 operate hybrid forms of sales taxation of the retail/ wholesale type, and 3 have dual-stage sales taxes. Eight countries still have multistage turnover taxes that have the strongest cascading effects.
Surprisingly, one out of every three countries included in the survey does not have a sales tax; these countries are found mainly in the Caribbean, the Middle East, and Africa. In the Middle East, broad-based sales taxes are not needed since alternative sources of revenue are available from oil revenues or oil transit dues. Most Caribbean countries operate extended excise systems instead of a sales tax, and in many African countries the economic base is probably too small to justify the introduction of a sales tax, and import duties together with selective excises still fulfill the revenue function adequately.
The large number of countries levying a wide range of excises on specified goods and services is also surprising. In fact, more than two out of five users extend the coverage beyond the traditional duties on tobacco products, alcoholic beverages, and petroleum products. One out of four countries operates an intermediate system; geographically this form is heavily concentrated in Europe and Africa. Extended systems are predominantly a Caribbean and Asian phenomenon; in the former area one out of every two countries makes extensive use of excise taxation, in Asia one out of every three countries. Products and services often singled out for selective taxation, in addition to the traditional excise goods, include matches, salt, sugar, soft drinks, textiles, cement, cosmetics, insurance, and travel. Seven countries, located mainly in the Middle East, do not levy any excises.
Table 3 also gives the contribution made by the sales tax and excise system to total tax revenues in each country. Receipts from sales taxes, as is customary, include those from sales taxes levied on imports. To make the excise data fully comparable, receipts from traditional excise goods include, as far as possible, the taxes on these items collected through the sales tax or in the form of an import duty.
An examination of the data produces some interesting information. First, in a representative sample of 63 countries for which data are most complete, the combined contribution of sales tax and excise systems to tax revenue is on average 37 per cent, which makes taxes on goods and services probably the most important tax category. Of this, sales taxes contribute 12 per cent and excise systems 25 per cent, but there are great variations from one country to another. In India, for example, two thirds of all tax revenues of central and state governments derives from sales taxes and excises, but taken alone the excise system contributes half of all tax revenues. Small countries tend to rely on excises more heavily than large countries, perhaps because the domestic manufacturing base for sales and income taxation is very narrow. This tendency is also more marked in countries with British taxing traditions.
The second point of interest concerns the differences in sales tax and excise patterns between low- and high-income countries. If the countries in the sample are divided along an arbitrary line of $600 per capita, the combined contribution of sales tax and excise systems is about the same in each of the two categories, but there are noticeable shifts in the relative contribution of each group of taxes. In low-income countries excise systems contribute 27 per cent of total tax revenues and sales taxes 11 per cent, but in high-income countries the shares are 23 per cent and 14 per cent respectively. Even in high-income countries the share of the sales tax in total tax revenue rarely exceeds that of the excise system. Table 4 shows that there are also important differences in the pattern of excise taxation. The share of excises on nontraditional goods, for instance, is significantly lower in high-income than in low-income countries, because in the former group most of these goods are included in the sales tax base. On the other hand, the contribution of selective taxes on services and motor vehicles is greater in high-income countries, which is obvious as the tax base is related largely to economic development.
|Nature of excise systems||Number of countries||Traditional goods (1)||Nontraditional goods (2)||Total goods (3=1+2)||Services, motor vehicles, other (4)||Total excise systems (5=3+4)|
|(In per cent of total tax revenue)|
|(In per cent of GNP)|
Third, the most widely and heavily excised goods are tobacco, alcoholic beverages, and petroleum products. Together, these items contribute on average more than 70 per cent of all excise receipts, or 18 per cent of total tax revenues. Ireland collects as much as 36 per cent, or 10 per cent of gross national product (GNP), from traditional excise goods, probably the highest ratio in the world. When fuel taxes, motor vehicle duties and other road user charges are considered jointly, the automotive field clearly emerges as the most important source of tax revenue in the majority of countries. Of course, all these considerations concern the relative preference for excises over other forms of taxation. If instead the importance of excises is measured against GNP, resulting excise ratios are higher in high-income countries; this agrees with the general postulate that most things are taxed more heavily in this group.
Role in economic development
The overall greater preference for excise taxation in low-income countries, particularly with respect to goods, is probably not surprising. After all, the first modern industries in these countries are usually either processing plants for local agricultural products such as sugar, tobacco, tea, coffee, meat, cereals; or import-substituting industries for products which have a large domestic market, such as matches, beverages, soap, and cement. In either case, such enterprises provide an obvious and relatively easy tax base because the products concerned are generally homogeneous and uniformly priced, which facilitates the imposition of an excise-type levy. As the economies of low-income countries expand and diversify, it seems likely that governments will be inclined to build on the administratively tested excise systems, to make up for the decline in import duty receipts generally accompanying import substitution, and to meet revenue demands that usually grow faster than the economy.
As economies grow more complex, however, large excise systems become more cumbersome. At a higher level of economic development, the inherently fragmented nature of excise coverage may not serve revenue needs adequately and may have undesirable economic effects. The free functioning of business and trade might be impeded, for example, because enforcement relies to a great extent on physical controls. With increased sophistication in taxpayers’ accounting methods, governments also have to modernize their assessing and collection methods, which implies a shift of audit and enforcement techniques to books of account. For these reasons, a broad-based sales tax is probably the appropriate alternative for high-income countries. It is technically better adjusted to business needs, potentially capable of yielding greater revenues, and conceptually superior in design. Although excises would not necessarily be abolished in these countries, their coverage could be expected to be confined to traditional excise goods, motor vehicles, and entertainment services, commodities that are usually subject to much higher rates of tax than prevail under a general sales tax.
Although the data appear to confirm the hypothesis that the taxation pattern of goods and services changes with the stage of economic development, some amplification and modification are required. First, the introduction of a large number of regulatory and protective excises in some high-income countries means that their excise systems remain of the intermediate or extended type. Second, particularly in low-income countries, the preference for excise taxation is partly a function of the availability of other readily accessible tax bases. Countries with exportable mineral resources, for example, may find it more convenient to meet revenue requirements from export taxes and related levies. Third, historic biases obscure the issue of excises versus sales taxes. Countries following the French tradition, for instance, clearly favor sales taxes over excises, and the opposite holds for those following the British. Although, therefore, differences may in fact be minimal, in form the systems may appear to diverge quite widely
Tax policy implications
Finally, theory and data point to some important structural issues relating to the choice between sales taxes and excises in the development context. An examination of the data of individual countries reveals not only that in most cases the revenue collected through excise systems is larger than that derived from sales taxes, but also that in many low-income countries the sales tax in fact amounts to little more than a supplementary import duty. This is either because there is no local production of the taxed items, because such production is exempted, or because sales tax rates levied on imports are higher than comparable rates on domestic goods. For instance, in Bangladesh, Burma, and Nepal, 90 per cent of sales tax collections relates to imports. A similar situation exists in francophone African countries, where between two thirds and three fourths of the sales tax is collected in the customs house.
It is also of interest to compare excise yields with sales tax collections relating to the domestic tax base only. Particularly in low-income countries the revenue from that part of the sales tax levied directly on domestic production is often not nearly as great as receipts from a single traditional excise commodity. For instance, in Uganda the amount of excise collections on either tobacco products or alcoholic beverages is as great as domestic sales tax collections, while petroleum products yield twice as much revenue. The smallness of the domestic sales tax base is further demonstrated by the fact that in most low-income countries, sales tax collections derive mainly from items that are typical excise goods: sugar, soft drinks, or cement. In Indonesia, for example, where domestic sales tax collections are in any case only slightly more than half the excise yield of tobacco products, 40 per cent of the tax is collected from sugar (on which an excise is also imposed) and rubber and 25 per cent from building construction (which is often taxed through an excise on cement).
It follows that countries with an extremely narrow domestic manufacturing and trading sector would probably have done better to postpone the introduction of a sales tax that is broad-based in name only. The demonstration effect of the “success” of broad-based sales taxes in industrial countries has probably recommended their application in developing countries, even though the economy in developing countries is not broad based. The evolution of the French sales tax in the postwar period, for example, can be readily traced in the systems presently existing in francophone Africa. A broad-based sales tax is unwarranted, however, if the manufacturing sector consists of mainly a few industries, such as traditional excise goods, sugar, soft drinks, soap, cement, and perhaps textiles. In such a situation excise-type levies would be more relevant. The greater ease of administering excises—with quantitative checks rather than accounting controls—is crucial, given the usual context of rudimentary bookkeeping methods and scarce administrative skills in developing countries. The best here may well be the enemy of the good. The psychological effect of administering a few excises well is likely to contribute to success in other development areas, whereas the premature introduction of advanced tax technology in the form of a broad-based sales tax would surely not have that effect.