chapter 6 Retailers and Other Small Traders

Alan Tait
Published Date:
June 1988
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So, Nat’ralists observe, a Flea

Hath smaller Fleas that on him prey;

And these have smaller fleas to bite ’em,

And so proceed ad infinitum.

—Jonathan Swift, On Poetry: A Rhapsody

There is no sector of economic activity where cooperation between traders and the vat authorities is more desirable than at the retail sale. Through the operation of the tax credit mechanism, the crosschecking of both purchases and sales is theoretically feasible at all stages before the retail level. At the final sale, purchases by a retailer can be checked against the sales of the suppliers; however, no such check is feasible for retail sales themselves because the final unregistered customers (the public) are not entitled to claim any credit for the vat on their purchases.

The possible loss of tax revenue through suppression of a portion of sales by a retailer may be greater under a vat than under a cascade-type business tax; for each retail sale omitted from the return, the loss of vat is at a rate of, say, 10 percent on the value added, compared with a much lower rate of, say, 4 percent on turnover to yield an equal revenue under the cascade tax.

On the other hand, the potential tax loss is less than it would be under an equivalent retail sales tax, as the vat collected at earlier stages is not wholly at risk unless the traders fail to remit the entire vat liability to the authorities. This is improbable, as a nil tax return would arouse suspicions at the vat office. Of course, a nil return under a retail sales tax would do the same. Under the vat, the traders earlier in the chain would know there is documentary evidence of the transaction; the retailer under the retail sales tax knows there is none. Revenue from vat is at greatest risk at the retail sale. Control in some form or another over retail sales is, therefore, a crucial objective of tax authorities in countries operating a vat.

Countries that successfully employ vat recognize that it imposes a burden on traders who must operate it and that to make the system workable at all, it must be adapted as far as possible to suit commercial procedures. In that spirit, the tax authorities in each country consult the various trade associations, including those representing small and medium-size retailers, from the earliest announcement that a vat is to be introduced. It is tactful for the authorities to acknowledge that they have much to learn about business practices, and the interchange of ideas can mean that the form of vat presented to the government contains the best of the combined views of the revenue authorities and the trade organizations.

Nowhere is this more important than at the retail stage. This chapter deals with this subject in some detail because the issue is often not given the importance it deserves; yet it is crucial for vat in developing countries and, indeed, in terms of administrative efficiency and compliance costs, it is equally important in developed economies.

Should the Retail Stage Be Included?

The retail stage can be excluded from vat coverage without affecting the essential structure of the tax. There are examples of countries with a vat levied only on imports and manufactures (for example, Indonesia), and some countries apply the tax at the manufacturing and wholesale stages only. There are several reasons, however, for including the retail stage within the tax net, if at all possible.

In the first place, it is best to avoid the need to differentiate between wholesalers and retailers, since the borderline definitions between them may be imprecise and many taxpayers perform both types of operations. Second, it eliminates the undesirable use of special adjustments (for example, standard markup or discount allowances) when manufacturers and wholesalers also act as retailers. Third, it removes the incentive to split firms and pushes distributional functions forward beyond the point where the tax is applicable, so that most of the value added can be attributed to the untaxed retailer. Fourth, because retail value added frequently represents such a substantial portion of total value added, including it in the tax base greatly increases the base and allows a lower tax rate to be used to collect a given revenue.

Without wishing to exaggerate the actual use of vat audits, the most important reason for including retailers in the tax coverage is related to the cross-checking feature built into the vat system. The link between transactions that is so relevant for tax administration ceases to operate when the last taxable transaction takes place, since the buyer at that point is not registered and, therefore, cannot possibly claim the tax paid as a credit. Thus, assuming the retail stage is included, it is retailers who more frequently resort to practices designed to evade tax, particularly if the large numbers and small volume of their operations make it difficult for the tax administrator to detect these strategies easily. However, since the retailer can claim the vat he paid on his purchases as a credit, cross-checking becomes feasible. The inclusion of retailers also facilitates cross-checking of sales by wholesalers and limits easy misrepresentation of the retail value added. If, on the other hand, retailers are excluded, evasion is made easier (by adjusting margins between wholesale and retail activities) for a sector that represents a substantial element of the total value added in the economy, and more significant revenue losses may result. It also requires higher tax rates to derive the same revenue.

Therefore, there is a strong case to extend the vat through the retail level, with the proviso that the smaller traders, including retailers, should be subject to some simpler treatment. This has been the preferred solution in Latin American countries. Even Peru, which used to have a vat levied only through the wholesale stage, has recently changed its legislation and now includes retailers; and Indonesia is actively considering extending the manufacturing and wholesale vat to include the retail stage by 1989–90.

The Retail Problem Is the Small Trader Problem

However, in some countries, especially in Latin America, it is not just the problem of the small retailer, but the case of small traders in general that should be the subject of special legislation. In the EC, the Sixth Directive follows this approach,1 but the discussion notes that a system of exemption and graduated tax relief cannot be considered as normal within the framework of the European vat and that the coexistence of different special national systems may hinder the removal of fiscal borders. The Commission’s final view (December 1983) is that the exemption and flat rate schemes (see below) are needed for small traders but should be harmonized, and the exemption level should be set at a level that excludes traders that cost more to administer than the revenue they produce. For such traders, the Commission’s report suggests replacing the “delivery rule” by a payment and cash receipt rule (that is, taxes accounted for on a cash receipts basis and cash payments basis).

Most countries should aim to use a common treatment for small traders in general, rather than having special schemes restricted only to retailers. Typically, in developing countries, these simplified schemes can account for over half the registered traders (for example, in Colombia, up to 70 percent use the simplified system and, in Korea, over 80 percent are “special taxpayers,” whereas, in the Netherlands, only 7 percent do not have to keep accounts for VAT). Though the retail stage is the principal problem, the problems of retailers are common to most small traders and can be considered under a common heading covering all traders and not just retailing.

The Criteria for Exemptions

What criteria should be used to decide which enterprises should be exempted (or those to be given the choice to opt out)? Turnover, value added, capital assets, numbers employed, number of establishments, number of owners, and profit have all been used to identify the exemption limit. Colombia, as an extreme example, uses four criteria for a trader to use the simplified scheme: (1) he must not be a juridical person; (2) his net income must be below a specified amount (Col$3.6 million when enacted in December 1983—the equivalent of US$40,500); (3) his gross assets at the end of the previous year must be less than a specified figure (Col$10 million in 1983—US$112,650); and (4) he must not operate more then two establishments.

Some countries use three options (for example, Austria). Others require two criteria to be jointly satisfied; for instance, in Indonesia the firm must have a relatively small turnover (US$36,000 a year) but also must have a small capital. A high value added can be associated with small capital and, regrettably, there are plenty of examples (especially in state enterprises) of high value added (wages) with little or no profit. In any case, both capital and profits are more difficult to assess and more open to flexible accounting conventions. Even using a single criterion, such as turnover, involves choosing a maximum amount. In this respect, countries differ sharply in their practices; for instance, Denmark considers a business “small” with a turnover under DKr 10,000 (US$1,576), whereas for Japan turnover under ¥ 80 million (US$627,000) is small. The easiest measure is the number of employees; perhaps this could be considered an alternative to using sales as the criterion for the craftsman type of business. However, if the number of employees is used as the only criterion, it raises the problem of defining “full-time employees” for those on occasional employment, members of family, and pieceworkers or out workers, all of which are common practices in most countries. Perhaps more important, it could discourage the employment of extra persons as the business approached the exemption limit.2 Indeed, when tried in France, many firms with 5–15 employees disappeared from the scene—at least statistically.

Argentina has one of the most complex sets of criteria: tax liability is assessed by the combination of net capital used in the business and the numbers employed and these, in turn, determine what is called the “fiscal debit.” Indeed, there is a different matrix for industrial establishments and for commercial and service undertakings. For instance, the tax to be paid with only 1 employee and net capital under

5,000 ranges from
864 for services to
2,160 for commerce; for traders employing 7 persons and up to a net capital of
25,000, services could pay a top rate of
14,964 and commerce
23,736; further, the Argentine “simplified system” allows a “fiscal credit” (trade is allowed 70 percent of the “fiscal debit,” industry 45 percent, and services 25 percent) for traders with net capital under
25,000 (US$6,397) and less than 7 employees.3

Another example, where turnover is used as the criterion but is differentiated according to function, is Morocco. The vat is levied on manufacturers with a turnover exceeding DH 120,000 a year (approximately US$15,000), but wholesalers are liable only if their turnover exceeds DH 3 million—US$376,000). Of course, commercial importers must always be liable for vat on their sales of imported goods even if they are small; evasion by splitting imports to get below any exemption limit would be too easy.

Each measure has some justification, but it is clear that the most usual and the most widely accepted criterion for exemption is turnover or sales (of course, the definition of “sales” causes some problems). To exempt smaller businesses from vat, using turnover as the criterion, requires agreement on the definition of sales for vat purchases (see Chapter 17).

Problems of Small Businesses

What are the distinguishing characteristics of the small trader? By identifying these characteristics, the authorities can tailor schemes to meet the peculiarities and problems of small businesses. Small businesses encounter problems in seven basic areas.


Small traders, especially those dealing with cash sales in more or less street market conditions, without using tills, find it difficult if not impossible to keep records of their gross takings. One way to deal with such traders, as discussed below, is to exempt them entirely from the vat. However, if the authorities want to include such traders under the vat, or if their sales are above the very small minimum turnover allowed for exemption, but still below some higher turnover which would enable them to be incorporated fully in the vat, then a further option is possible. Such traders usually buy their inputs from a relatively few suppliers and have a better idea of their gross purchases than of their sales. In this situation, the authorities can create a special scheme allowing the trader to make a return showing the cost to him, including vat, of the inputs in the tax period and allow a standard markup to be applied to that total. The purchases plus the markup represent his gross receipts and are then multiplied by the coefficient needed to produce the figure for vat liability on sales inclusive of the vat (for example, in the case of a 10 percent vat, by 10110 or 0.091).

The markup has to be calculated according to the type of business. For instance, in the U.K. special “Scheme C” for retailers, five markups can be used, categorized by the trade classification of business. Under this system tobacconists, news agents, and retailers of liquor are allowed a markup of one sixth (16.33 percent); grocers, butchers, and bakers are allowed one fifth (20 percent); greengrocers, sellers of radios and electrical goods, book shops, and chemists, two fifths (40 percent); jewelers, three quarters (75 percent); and all others, 50 percent.

The advantage of this type of markup system is that it is extremely simple and that it requires little record keeping on the part of the trader. It is also easy to audit selected traders’ returns of their purchases from the sales of their (usually few) suppliers and, therefore, such a scheme continues to fit into the full vat framework. The disadvantage of the scheme to the revenue authorities is that in using the fixed markup they are usually underestimating the actual value of the sales, sometimes by quite a large amount. The loss of vat revenue is only on the difference between the assumed and the real markup and is usually considered a minor cost outweighed by the simplicity of the scheme and the savings in administrative costs.

From the trader’s point of view, the fixed markup can also be a disadvantage if his own average markup is less than the fixed one assumed for the tax calculation; in this case, the small trader could end up paying more tax than he should. Obviously, this type of arrangement should not be used for a very large business, although in the United Kingdom large retailers do use it (which suggests that the official markup may be too low or that the savings in compliance costs on the full vat are considerable). At the same time, providing the authorities set the markup sufficiently high, the loss of revenue is likely to be small and, of course, if the markup selected is high, it will provide an incentive for traders to opt to enter the full vat scheme and keep the proper records of their sales, rather than run the risk of being penalized under the special scheme of fixed markups.

Multiple Rates

Small traders also have problems with multiple rates of vat. No vat uses only one rate. Even the simplest systems use a standard rate in conjunction with a zero rate, and some single rate systems are made into multiple rate systems by allowing percentage reductions from the base invoiced sales. Many use three or four rates. The use of multiple rates greatly complicates the task of fair treatment for small traders. This emphasizes, once again, the desirability of using only a single rate and keeping the options for exemptions or zero rates to as few as possible (see Chapters 3, 4, and 5 for a discussion of the problems of selling exempt goods and services). Indeed, the U.K. example exemplifies the dangers even with a single positive rate; because the United Kingdom opted to use the zero rate for a large number of activities, it greatly complicated what ought to have been a simple vat.

Small traders may find it difficult to keep records of gross takings and even if they can do so, they may often find it difficult if not impossible to split their sales between the sales liable to different rates of vat. To keep a record of sales differentiated by vat rates requires the use of separate tills for the different products or till rolls that can identify and add up the different VAT-rated products. Moreover, the person operating the cash register must be able to identify quickly the objects liable to different vats, and the means used for such identification must not be open to easy alteration by the customer. For example, some businesses have identified groceries liable to different rates by having different colored price labels; unfortunately, customers found it easy to switch price labels in the shops and, unless the register operator is extremely knowledgeable, the evasion can succeed (indeed, the robbery can succeed—for that is what it is). Moreover, distinguishing the different tax liabilities at the cash register requires honest operators who will not be tempted to give special advantages in reward for helping the evader or even just to favor friends (by merely pressing the wrong tax key). Even descriptions of such problems reinforce the arguments against multiple rates, especially in developing economies.

The way to deal with this problem is similar to that in the previous case. The vat liability can be derived from looking at the input cost of purchases and using the ratio of different vat rates on purchases as the same ratio to be applied to the gross takings. Small traders will usually be able to identify the vat content of their purchases and this can be used as the ratio for their sales. For example, if a third of the goods were zero rated, another third standard rated, and the final third luxury rated, then sales would be similarly divided into thirds.

The disadvantage to the trader is that if a higher markup is used for the lower-rated goods than for the higher-rated goods then he could pay more tax under this scheme than under the full vat. More likely, if this assumption were reversed then the revenue could be lost to the authorities. Once more, if the assumed markups were relatively high, there would be an incentive for the small trader to eventually opt for the full scheme and keep the full records.

Another difficulty can occur if goods purchased under one rate are transformed into something sold under a different vat rate. A classic example is meat bought for human consumption (zero rated) but sold later as pet food (standard rated). Of course, this is not just a problem for small businesses and is likely to be even greater in developing countries, where small traders frequently combine the functions of new material purchasers, manufacturers, and retailers.


The third difficulty faced by some small traders is that stocks can play a disproportionately large role in their enterprises. If, as under the previous two proposals for special schemes, the vat liability on output were derived from purchases, such traders could be penalized. For instance, a craftsman who purchases inputs might take a considerable time to manufacture the salable product and, moreover, might stockpile the goods for a particular time of year, for example, a tourist season or a particular festival, such as New Year. In such a case, if his vat in any given tax period were related to his purchases with the standard markup, then his stocks would be paying a vat for some time before he was able to recoup the vat liability by an actual sale.

Of course, the legitimate way to meet such complaints is to allow the trader to keep accounts so that he could be a full participant in the normal vat, whereby his tax liability on inputs could be subtracted from his (temporarily) very small sales (and he would obtain a refund or carry a credit forward to the next period). His actual tax liability on actual sales would not occur until they were made. In this way, the vat charge on his purchased stocks would not occur. However, if small traders are to be indulged, then schemes can be created to take account of the problem. Indeed, the U.K. special schemes for retailers allow four different ways to meet this problem (Schemes E, G, H, and J). The simplest variant is to allow the trader to make a vat return using the expected selling prices, including vat of the inputs purchased.

As before, the more complex the rates, the more complex such schemes have to be. If there is more than one rate used, then the split of tax liability on purchases is used to split the trader’s gross takings, provided this does not create any obvious anomalies—which can be left to administrative discretion under regulations.

Provision of Services

A fourth problem is that small traders can provide services either in addition to goods or as a quite separate activity. By their nature, services usually involve relatively small current purchases. Of course, when starting a business providing a service, the trader may be involved in large capital purchases; for instance, a barber will have to purchase a shop, special chairs, and equipment. However, once equipped, his current inputs are trivial. Much the same is true of many other services. This means that the special schemes to meet the problems of retailers who cannot, or will not, maintain records of sales cannot be used for services. There is no way the purchases of a hairdresser can be marked up to assess the gross takings of that trader. It is true that some services might have a closer relationship to their purchased inputs for their sales (for example, spare parts for automobile repair) but, in general, the variety and quality of services is such that the final sales cannot be associated easily with purchased inputs. Therefore, the only special treatment available for small traders providing services is the total exemption or the special schemes such as forfait mentioned below.

Compliance Costs

All small businesses claim that compliance costs, as a proportion of tax paid, are much higher for them than for large businesses, although it is clear that this particular complaint seems much stronger (or perhaps better documented) in Korea and the United Kingdom. In the Federal Republic of Germany, business is concerned about the burden of federal and state legislation, but vat is seen as only part of the problem, not a particular problem in itself.

In the United Kingdom, the million smallest registered businesses (76 percent of those registered for VAT) pay only about 7 percent of total vat revenue (1983/84), so that it is worthwhile not only for the traders but for the vat authorities as well to simplify the costs of tax compliance for such businesses. Similarly, in Mexico, almost 90 percent of the vat is collected from only 10 percent of the registered traders. Perhaps one lesson from European vat complaints is that businesses prefer to deal with the same taxing authority for both vat and income tax; complaints seem to be loudest where the authorities are different. In addition, many small traders would prefer the option to use accounts and compute their tax return on a cash rather than an accrual basis. It might reduce compliance costs if small businesses were given the option of making returns on the usual monthly, two monthly, or quarterly basis or making only two returns, or even one return a year. Also, the authorities can assist by giving small businesses, free of charge, a simple account book.

Cash Transactions

Again, small family traders frequently pay for their purchases out of the till. No record is kept of the cash transaction, and at the end of the day it may even appear that their sales are lower than actually occurred. This distorts the vat record of both inputs and sales. The vat legislation must forbid this practice and, of course, this is one of the major reasons why some countries have tried to oblige retailers to issue a sales invoice.


Finally, most traders, and particularly small traders, consume part of their own production or stock. These self-supplies are a taxable transaction under vat and tax should be paid on them. It is, however, difficult to enforce charging vat on self-supplies, and the use of fixed markups, as described above (see section on “Records”) is one way of alleviating this problem. In any case, self-supplies are usually estimated at the end of the year and not as goods are withdrawn from stock.

Five Ways to Treat the Smallest Businesses

The smallest businesses can be handled in five ways:

(1) Some countries simply exempt potential taxpayers with turnovers of less than a certain amount. The vat, of course, applies to their purchases, including those of supplies and equipment, as well as materials and articles for resale. This is, basically, the practice in most countries in the EC. (For more details see below.) Some countries in Latin America, such as Costa Rica, Honduras, Nicaragua, Panama, and, to some extent, Brazil in its state vat, also follow this approach.

The greatest advantage of this system is that it alleviates the task of the tax administration by eliminating the smallest traders from the tax net. An important drawback is that larger firms feel discriminated against, and this may influence their attitude toward voluntary compliance. This was exemplified in the controversy over the British proposal to increase the exemption limit to £20,500, and the support for it to be increased to £100,000;4 it was claimed that the higher the limit was raised, the more valuable the exemption became, and that therefore the more onerous it became for a trader to cross the divide from being tax exempt to taxable. This was referred to as the “poverty trap” for small business. Obviously, as soon as a small business crosses the line and becomes liable to vat, the tax liability will reduce profits; to earn the same profits net of vat as he did before, the trader has to have a large increase in turnover, which, of course, is unlikely. In the circumstances, small traders are likely to suppress the sales figures that take them above the limit, and larger traders feel further penalized.

(2) A second method is the use of a multiple rate system to favor selected small businesses. For example, in Korea, in 1983, the vat scheme for small traders (“special taxpayers”) did not use exemptions but special rates. This created effective tax rates one third to two thirds of the usual vat taxpayer’s liability, depending on the particular trade; restaurants and construction businesses appeared to be the most generously treated (Table 6-1). Needless to say, such preferential treatment has a substantial revenue cost (and a certain inequity) to cater for the special problems of small traders.

Table 6-1.Korea: VAT Tax Rates by Industry
Value Added

as a


of Sales
Effective Tax Rates


Agriculture, fishery, and forestry75.117.51
Electricity, gas, and piped water8.04
Wholesale trade11.071.11
Retail trade9.190.921.77
Real estate8.480.85
Hotels and inns39.753.971.95
Transportation, storage, and communications61.126.111.94
Renting and leasing42.554.262.00
Proxy, intermediary, and consignee services56.035.603.46
Other services50.465.052.09
Source: Korea, Ministry of Finance (Seoul, 1984).
Source: Korea, Ministry of Finance (Seoul, 1984).

(3) A third system tries to meet this problem by making sales to small exempt firms subject to a higher rate of tax than the regular rate. Used first in Belgium, this approach was followed by Spain, Turkey, and Argentina. All businesses must register for vat, but small taxpayers are given a special recognizable number if they qualify (correct business sector, turnover less than a certain amount, and certain other conditions) and opt to be taxed under the “equalization tax scheme.” Under this system, their suppliers must collect from the small trader an approximation of the tax (called, in Belgium, the “equalization tax”) that would have been levied on their sales and pay it to the treasury. The only obligation of unregistered small businesses is to keep the purchase invoices, subject to having to pay taxes on their inventory again if the invoices cannot be shown if the administration checks. Small traders under the scheme can apply for reimbursement of vat paid on their purchases of certain investment goods.

Although technically attractive, the system is somewhat cumbersome and there are four points to be noted about this scheme: (a) It is used only for a limited range of retailers (food, some clothing and furnishing fabrics, hardware, and books and newspapers), where the markup tends to be uniform and well known. (b) It complicates the work of firms that sell to registered and unregistered taxpayers, as well as to final customers. Each one of these categories of buyers would require a different documentation and, in addition, an unregistered taxpayer would be better off not disclosing his condition since this would imply paying more tax than a final consumer. (c) It transfers the burden of tax administration to the suppliers and to some suppliers (those dealing with small traders) more than others. Indeed, some wholesalers may be unwilling to sell to such exempt traders because of the extra compliance cost involved. (d) It is worth noting that each country that has experimented with this system has either given it up or is about to do so. Turkey experimented with this system in 1985, its initial year of vat operation, but then removed it apparently because of complaints from large businesses and wholesalers.

To be fair, the Belgian authorities consider the scheme convenient and successful; in their view, there is little fraud with the system. Should they give it up, it is more likely to be because of pressure from the EC Commission for tax harmonization rather than because of dissatisfaction with the scheme.

(4) A fourth system is the forfait. It is used, for example, in Argentina, Chile, Madagascar, Mexico, and Niger for very small traders.5 It was suggested but rejected in Portugal. A forfait system implies an arrangement between each trader and the local tax office for determining the amount of the trader’s sales. Estimates of sales under a forfait system are usually done on the basis of trading results for a previous year, adjusted for general factors affecting all businesses, and any factors that might have relevance only to the particular trader. The effectiveness of the system depends on the frequency and thoroughness of the periodic reviews undertaken by the tax office.

Thus, for a forfait system to be applied with a measure of equity and success, a large number of staff and strict controls are required. In most circumstances, a forfait system absorbs an unreasonable amount of administrative resources. It means the diversion of valuable resources to trivial and unproductive work. Another important factor to keep in mind is that often some 80 percent of those taxpayers subject to a vat account for only about 10 percent of the total sales that would be subject to the tax. A forfait system involves large numbers of staff, inconveniencing many traders about often controversial assessments that yield relatively little revenue. However, some countries appear to use a forfait efficiently (for example, Belgium) and claim that it eases the task of administration. If used, it is perhaps best combined with the income tax assessment and not administered through the vat.

(5) A fifth system, similar to the forfait, is used by Ecuador and Peru. It consists of determination of the tax base by the tax administration on the basis of whatever records the firm has and, if the latter are insufficient or unreliable, external criteria. The figures thus set remain valid until a new estimate is made by the administration. The tax rate is applied to this figure, and the taxpayers then are allowed to deduct tax paid on purchases, but only up to the limit of the nominal tax liability previously calculated. It is argued that this system, contrary to the one that provides for outright exemption of the small taxpayer, creates an incentive for the small taxpayer to request invoices from his suppliers. But the system is ill suited to detecting the need to change the original estimates and, therefore, does not function well under rapidly changing conditions, such as under inflationary situations. In addition, it tends to confer too much power on the tax inspectors, increasing the chances for corruption.

Italy has experimented allowing traders, whose revenue did not exceed Lit 780 million (US$642,000), to calculate their vat credit against vat on sales by using a flat rate deduction—25 percent for services, 45 percent for production of goods, 97 percent for distribution of petroleum, and 6 percent for traders and professions. This is, of course, equivalent to a turnover tax at the various rates.

Japan proposed in 1987 to have a simplified system for “smaller” enterprises, which would be allowed a uniform tax rate of 1 percent of annual sales; that is, the implicit assumption, with a 5 percent vat rate, was that most businesses would have inputs equivalent to 80 percent of their sales.

Overall, the preferred option is to exempt the very smallest businesses and accept that some advantage may accrue to them. However, the sales that determine the exemption limit should be kept at a low level and one of the alternative methods discussed should be used for small and medium-sized traders.

Treatment of Small Enterprises in EC Countries

France, the Federal Republic of Germany, Ireland, and, to a certain extent, Italy, had earlier turnover taxes covering the retail stage and so were experienced in the handling of large numbers of small businesses. In other countries, the previous turnover taxes did not embrace the retail stage, so the changeover to vat brought in many new taxpayers. In the United Kingdom, for instance, it involved an increase from about 75,000 taxpayers to 1,250,000. In some countries, notably Belgium and France, and to a lesser extent, the Netherlands, the application of the vat to the retail stage carried with it delicate political overtones, and great care was taken to avoid arousing the opposition of small traders. In Denmark, the emphasis was on equal treatment for all businesses, and accordingly, it was only the persons at the very bottom of the scale who were exempted, and the exemption limit (DKr 10,000—US$1,576) remains strikingly low to this day. In other countries, however, the approach appears to have been that it would not be worth wasting valuable administrative resources on small cases and the mechanisms for dealing with small businesses were prepared with that in mind.

By April 1, 1973, the nine EC member states had adopted vat, each with a system for small enterprises which it considered best suited to its individual circumstances. In some countries, the criterion for special treatment was based on the amount of sales, in others on the amount of tax payable. In some countries, marginal relief was given for turnover or tax liability significantly in excess of the limit of complete exemption, that is, a form of graduated exemptions. Table 6-2 summarizes the special provision for small enterprises under the various vat systems of the EC member states.

Table 6-2.Summary of Treatment of Small Firms Under VAT in Selected Countries, 1982–87

Tax Exempt

but Must



AustriaTurnover under S 3.5 million (US$301,000); assets under S 900,000 (US$77,000); profit under S 195,000 (US$16,777)Tax payable abated by deduction; if turnover is up to S 50,000, deduct 20 percent, to S 100,000, 15 percent, and to S 150,000, 10 percent
BelgiumTurnover under BF 4.5 million (US$130,000); for food and retail sales under BF 2.5 million (US$72,000); others are liable for “equalization tax” levied by suppliersTurnover under BF 20 million (US$578,586): sales derived from purchases by markupsWhen markup cannot be used, labor costs and profit margins used
DenmarkTurnover under DKr 10,000 (US$ 1,576)
FranceTax liability under F 1,350 (US$242)Turnover under F 500,000 (US$89,681) for goods and hotels, under F 150,000 (US$26,904) for servicesTax liability F 1,350–5,400 (US$242–968) partial relief
Germany. Fed. Rep. ofTurnover1 under DM 20,000 (US$12,108)Turnover under DM 60,000 (US$36,326) entitled to net rebate of tax on reducing scaleTurnover under DM 20,500 (US$12,411); tax liability reduced by 80 percent, DM 20,500–60,000; remaining 80 percent is reduced by 1 percent for each DM 500
GreeceTurnover under Dr 1 million (US$7,589) for goods or under Dr 250,000 (US$1,897) for servicesTurnover up to ECU 10,000 (US$7,984)
IrelandTurnover under £Ir 30,000 (US$48,273) for goods or under £lr 15,000 (US$24,136) for services
ItalyTurnover under Lit 18 million (US$14,825); inputs percentage of sales, hotels 50 percent, retail sales 70 percent, artists 20 percentTurnover under Lit 780 million (US$642,451) flat rate credits
LuxembourgTurnover under Lux F 200,000 (US$5,785)TurnoverLux F 200,000–1 million (US$5,785–28,929), reduce tax liability by 1 percent of difference between Lux F 1 million and actual sales
NetherlandsTax liability under f. 2,050 (US$1,104); customers get vat creditTurnover under f. 2,050–4,150 (US$1.104–2,236) partial relief
NorwayTurnover under NKr 12,000 (US$1,891)
PortugalRetailers with purchases under Esc 4.5 million (US$33,311)Coefficient of 25 percent applied to vat paid on inputs
SpainTurnover under Ptas 50 million (US$445,354)Number of employees, rooms, vehicles, etc., used as indicators
SwedenTurnover under SKr 30,000 (US$5,027)
United KingdomTurnover under £20,500 (US$ 11,368)Special schemes for retailers
Côte d’IvoireForfait
MadagascarTurnover under FMG 5 million (US$3,957)Forfait
Western Hemisphere
ArgentinaTurnover and net worth; suppliers use special low rate not creditable if sales made to registered traders20 x 20 matrix of capital and numbers employed combine to give tax LiabilityA form of forfait
BoliviaTurnover under$b 200,000 (US$90,090)
BrazilExemption limit set by response to indexed (OTN) figuresEach state has special schemesForfait at both federal and state level
ChileFixed debit corresponding to imputed sales against which vat on inputs offsetImputed average sales
ColombiaTurnover and gross assets: standardized “mark-down” adjustments usually cancel vat liability
Costa RicaTurnover under
300,000 (US$4,216)
HondurasTurnover under L 12,000 (US$6,000) for “minor taxpayers” under income tax Iaw
MexicoForfait used extensively
PanamaTurnover under B 18,000 (US$18,000)
PeruTurnoverTurnover on estimated sales US$9,000–46,000; simpler techniques for calculation option for small firms for estimated sales or regular VAT
Asia and Pacific
IndonesiaTurnover under Rp 60 million (US$36,190) and capital under Rp 10 million (US$6,031)
Japan2Turnover under ¥ 80 million (US$627,000)
Korea“Simplified invoices”Special low rate for appropriate cash registers
New ZealandTurnover under $NZ 24,000 (US$15,813)
Source: Various country reports.

See text For fuller discussion.

Proposed but rejected.

Source: Various country reports.

See text For fuller discussion.

Proposed but rejected.

Important features of provisions in the Sixth Directive relating to small businesses are as follows:6

(1) Member states may retain their existing systems of relief for small concerns. If their turnover exemption threshold was less than European Currency Units (ECU) 5,000 (US$4,283) on May 17, 1977, it could be raised to that limit. Member states that applied tax reliefs graduated according to size of turnover could neither increase the ceiling of the graduated tax relief nor allow the condition for granting it to become more favorable.

(2) Member states that had not made use of the option to provide a scheme for small enterprises could allow exemption from tax to taxable persons whose annual turnover was at the maximum equal in national currency to ECU 5,000.

(3) Member states, giving an exemption from tax where the annual turnover for exemption was ECU 5,000 or more on May 17, 1977, could also increase the annual turnover limit to maintain its value in real terms.

(4) Exempted small enterprises are not entitled to any credit for tax borne on purchases nor can they show tax on invoices issued by them. They may, however, opt for normal vat treatment, a course they might follow if, first, most of their customers are taxable persons who would want vat invoices for their purchases or, second, they are engaged in a regular export trade and they wished to gain the benefit of the zero rate.

No authorization has been made to raise the ceiling above ECU 5,000. Yet those countries that used a limit above ECU 5,000 before joining the EC have been allowed to increase their limit to maintain the value in real terms (the United Kingdom to ecu 28,000 by 1981 and Ireland from ECU 3,000 and ECU 18,000 in 1970 to ECU 15,000 and ECU 30,000, respectively, in 1981). The EC Commission, however, has noted, “Bearing in mind that an upper limit had been imposed on Member States with exemption ceilings equivalent to less than 5,000 ECU, this development flouts the principle of the Sixth Directive, which was designed to restrict any increase in exemptions.”7

Moreover, “the broad latitude described above has led to marked divergences between Member States’ administrative arrangements which should be ironed out by the end of the transitional period by means of a common simplified scheme system of exemptions. The Commission intends to draw up a fuller report on the situation in Member States.”8

Table 6-2 describes the main features of the treatment accorded to small businesses under the principal vat systems. Basically, there are four main options: exemption, a simplified scheme, forfait, and special reduced rates. Exemption can either be complete or it can be exemption with an obligation to register. Countries such as Denmark, the Federal Republic of Germany, Ireland, Luxembourg, and the United Kingdom (and Norway and Sweden outside the EC) have a basic complete exemption based on turnover; the lowest turnover for complete exemption is that used by Denmark (US$1,576). The German exemption with a turnover of US$12,108 may be misleading as it applies to businesses with a turnover of DM 20,000 in the preceding year and an expected turnover in the current year of not more than DM 100,000 (there were 9,000 such cases in 1982, representing a vat revenue loss of DM 2 million). Some countries such as Ireland have different turnover exemption limits to those providing goods (US$48,273) and those providing services (US$24,136) and, in fact, the EC Commission views the Irish limit as the highest in the Community. Usually such exemptions are not mandatory; the small enterprises selling to taxable persons or exporting regularly may elect to be taxable and to be full members of the vat system.

Some countries allow an exemption for small businesses, but still require them to register (for example, France, Belgium, and the Netherlands). In the Netherlands, exempt businessmen with vat liability below a specified (small) assessment do not have to register (and cannot pass the tax on). Other small businesses must register and can issue invoices showing vat included, but still get tax relief in the form of a reduced tax liability.9

The second major category is those countries that use a simplified scheme, often in conjunction with complete exemptions. For example, all traders in Belgium must register, but below a certain limit may opt for the “equalization scheme”; in addition, there is a scheme for businesses between the limit for the equalization scheme and up to a turnover of BF 4.5 million (US$130,000) in the general food sector and BF 2.5 million in other sectors.

Germany uses a scheme to encourage compliance and reduce administrative costs. A trader whose turnover exceeds the threshold (approximately US$12,000) by no more than $300 remits to the authorities only 20 percent of the vat collected on sales over the threshold. The percentage that must be remitted increases by a percentage point for each additional $300 of sales until a trader with sales of approximately $36,000 is paying full vat. While this compensates the small trader for part of his compliance costs, it does mean that the public (who pay the full VAT) are directly subsidizing these traders. The principle that taxes collected by agents should be entirely remitted to the treasury should not be easily forgone. Tax farming should not be undertaken lightly.

This description of so-called simplified schemes should include a mention of the special schemes for U.K. retailers. Though undoubtedly designed with the laudable intent of simplifying the vat for smaller businesses, they do represent the most complicated set of “simplified” schemes. In trying to please every small trader with their individual problems, the U.K. Customs and Excise seems to have created a series of options that may well involve more work for the administrators than ease for the businessman. As explained earlier, these schemes can be of the simplest variety, but also include more complex ideas allowing traders to estimate gross takings from their purchases of inputs and can also involve adjustments for stocks. One scheme (Scheme “G”) involves calculating the output tax from the value of goods received and splitting them between zero-rated and standard-rated goods according to the ratio of the inputs. However, there is a penalty built into this scheme where one eighth is added to the calculated output as an arbitrary amount to prevent abuse of this particular scheme.

Of course, as already described above, forfait is used in Belgium, France, and Spain (and in many non-EC countries, including Brazil, Mexico, and a number of African countries).

Finally, there are some countries—Austria, France, the Federal Republic of Germany, Luxembourg, and the Netherlands—that use special schemes with reduced rates to give some partial relief to the small trader. In a sense, this again is a somewhat arbitrary way to keep the small trader in business (on social grounds) or to compensate a small trader for the higher compliance costs he faces in operating the vat. Presumably it is hoped such schemes will dilute the annoyance, protest, and possible evasion of such taxpayers. The EC makes proposals10 for harmonizing these treatments. First, member states must offer a tax-exemption scheme (a registration threshold) for traders whose turnover does not exceed ECU 10,000 (US$12,524); an option is allowed for countries that already have a higher threshold to adopt one up to a maximum of ECU 35,000 (US$27,946). Second, a simplified accounting scheme should be offered (see page 137, below).

The Preferred Solution

A preferred solution is, first, not to distinguish between retailers and any other small business and, second, to divide small businesses into two categories, as described below. Those taxpayers with a turnover below a relatively small amount should be exempted from the vat. It is not envisaged that businessmen with sales below this ceiling should be registered or required to make any returns for vat. All traders should, however, as a minimum, be required to record and file, in a readily retrievable fashion, their purchase invoices. There should be a severe penalty for nonregistration if sales exceeded the limit and were not reported for registration.

A small trader decides whether to register or not, mainly on whether he sells to registered or nonregistered persons. In selling to nonregistered persons, the trader with a large element of his selling price represented by his own value added (labor and profits) is likely to be better off not registering. If he sells to registered persons, it comes down to a trade off between the increase in costs and the preference of his registered customers for an invoice showing vat. Chart 6-1 shows the simple sort of decision route needed and used in New Zealand.

Chart 6-1.Decision Chart for Small Traders

Source: New Zealand, GST Coordinating Office, Self-Employed and GST (Wellington, 1986).

A new business expecting to have sales (if they can be anticipated) in excess of the limit for nonregistration would be required to register at least one month before starting business. An existing business, crossing the threshold for the first time, would have to register within one month of the end of any 12-month period for which the sales exceeded the limit unless, first, they were not more than 25 percent above the limit and, second, they were not expected to exceed the limit in the coming 12 months. Traders and providers of services, with sales between the total exemption limit and some slightly higher limit, would be entitled to use a simplified system of accounting for which an account book would be supplied free by the tax authorities together with guidance on its completion.

The purpose of having the second category of small traders is to make the transition to vat easier for taxpayers and to help the tax administration. This is done by providing a simple notional basis for taxing small businesses above the exempt limit. It could be enacted as a temporary provision to be used by no trader for more than, say, five years without review. Under this alternative, which would apply subject to the approval of the local tax office, the tax payable for a given taxable period would be a prescribed percentage of the aggregate amounts of tax shown on invoices of goods purchased for resale during that period. If it is assumed, for example, that the value added at the retail stage amounts to 25 percent of the value of inputs, the prescribed markup would be 25 percent. In this case, taxpayers subject to this scheme would pay a tax equivalent to one fourth of the vat on their purchases (similar to the scheme operated in Portugal).

The tax would be payable quarterly even if most businesses pay monthly (again, this is a controversial matter and some authorities argue for only an annual liability—see the discussion above). The markup rates would be set to take account of losses from stock (due to theft or breakage) and bad debts. Those who felt the fixed markups were too high for their business would need to prove it by keeping detailed records, but they would have to pay the amount due according to the markup calculation until they had proved their case. The vat paid on capital goods (limited to buildings, plant, and equipment) would be allowed as a deduction against vat liability. Such a system should sharply reduce the number of returns that have to be rejected and the appeals against assessments that have to be considered.

Approval for this option would be required from the local tax office to ensure that the establishment was a bona fide trader and not, say, a retail outlet for a manufacturer supplying goods at artificially low prices, which would be recovered by charging a higher than normal retail profit margin. This could be checked by comparing the purchase invoices with the normal retail selling prices. The director of the local tax office should also have power to withdraw the approval for the use of this option, where more than, say, 50 percent of the sales are related to goods acquired from an associated trader. To prevent abuses, the local tax offices should be empowered to make vat assessments in instances where information available or inspection of the taxpayer’s premises indicates that invoice totals have been understated.

This scheme merely requires taxpayers to list and file their invoices of purchases, setting out the amount of purchases and the amount of vat. During the transitional period, the authorities could evaluate the results of this option and decide whether to continue to offer this alternative to the taxpayer. One of the main advantages of this scheme is that it allows the tax department to concentrate on larger taxpayers during the initial periods of vat by removing a considerable number of small taxpayers from the ordinary requirements of vat.11

It must be stressed that this option is an alternative offered to small traders. They can, if they choose, use the simplified account books, which would be provided free by the tax authorities.

A taxpayer wishing to supply vat invoices to his customers would have to come into the full vat system irrespective of the volume of his sales. In addition, small businesses, who want to, may opt for paying according to normal vat procedures.

It should also be stressed that this type of scheme works better for traders who sell goods than for those who provide services. There are two reasons. Typically, the purchased VAT-liable inputs of suppliers of services are few, infrequent, and at low cost. Second, generally, services have a much higher value-added content. Consider repair shops, hairdressers, painters, gardeners—all examples of small tradesmen whose taxable inputs are relatively trivial and where a scheme to base vat liability on a presumed markup would founder. The input purchases could be too infrequent and erratic as a base; the high and maybe variable value added could create inequities in vat treatment between traders and over time. Even where services can have expensive inputs (for example, computers, restaurant kitchens), these still tend to be infrequent and value added is still characteristically high.

It may be better to have a separate lower threshold for services. Those selling mainly to nonregistered persons would probably decide not to register. Those registering would use the simplified scheme but the authorities might wish to ensure that the assumed value-added markups were not sufficiently high to encourage traders to opt to fulfill the full requirements of the usual vat.

Records for Small Traders

Present Policies

Based on EC guidelines, the vat codes of all European countries require: (1) the strict enforcement of correct invoicing in taxable transactions between chargeable persons, and (2) the maintenance of a minimal standard of bookkeeping by all taxable persons sufficient for a trader to complete his vat returns properly and for the tax authorities to audit them.

Small traders must keep records to satisfy the authorities. All purchases of goods and services received, whether taxed under vat or zero rated, should have invoices from the supplier, and such invoices must be kept. All records of credits allowed or received must be kept. At the same time, the authorities should require businesses, including small businesses, to keep their normal business records, including orders and delivery notes, purchase and sales books, cash books, till rolls and any other records of daily receipts, documents relating to imports and exports, and the usual annual accounts.

In Latin America, the vat law usually requires the businesses to issue a simplified invoice for retail sales except where it is clearly impractical (for example, in food markets and supermarkets). In most European countries, there are no requirements for the issue of documentation by retailers to final consumers for three good reasons. First, it is altogether unreasonable to harass traders with such an enormous burden in circumstances in which it is not already their commercial practice to give receipts or dockets to final consumers. Second, it creates invoices showing vat that could be used, falsely, to claim credit against vat liabilities. Third, it should be much more profitable to concentrate the revenue audit staff on controlling invoices relating to transactions between registered persons, working downward from importers and mining and manufacturing activities through wholesalers to purchases by retailers.

This does not mean that figures of retail sales are not checked; they are. But the primary concern is to ensure that all taxable transactions between registered persons are covered by invoices that correctly show the full consideration for every taxable sale, and that a more or less common bookkeeping system is installed, into which the relevant figures are channeled so that they can be readily checked by the revenue auditor. In this way through the production chain reliable particulars of purchases are established for retailers, and, as a computer operation, any trader, whose rate of gross profit as returned for vat falls short of the norm over a period of time for his particular trade classification, is earmarked for investigation.

Korea, despite having an almost ideal vat in many ways, provides a good example of the problems associated with a rigorous application of vat to the small trader and why it should not be attempted in many countries. Compared with his European or Latin American counterpart, the position of the Korean retailer is more demanding. The law requires separate records to be kept for taxable and exempt sales, and no simplified schemes are available for apportioning total receipts between taxable and exempt elements. The law requires a standard form of bookkeeping for retailers as well as other traders. A separate entry is supposed to be made for sales transactions, giving particulars of the goods, quantity, and unit price. For each taxable sale, a retailer is expected to issue a “simplified tax invoice” and for each exempt sale, a “simplified income invoice.” For mixed sales involving taxable and exempt items, a single simplified tax invoice may be used, the amount for exempt items being entered on the “remarks” columns. If an error is discovered after the issue of a simplified tax invoice, the latter should be recovered and canceled and a corrected simplified tax invoice issued in its place. If it cannot be recovered, another simplified invoice should not be issued instead. No matter how small a retailer’s total sales may be, or how trivial an individual sale may be, he is required to issue a simplified tax invoice (or a simplified income invoice) for each sale.

A cash register docket fulfills the function of a simplified tax invoice or a simplified income invoice and, in the early stages of the Korean vat, traders were encouraged to buy the appropriate cash registers by being allowed to levy a reduced rate of vat if they did so. Purchasers of retail goods were encouraged to ask for receipts (or invoices) through lotteries related to numbers printed on the cash register sales invoices. The whole scheme was elaborate and small traders, not unnaturally, complained, despite actually being favored by a low tax liability. Ironically, as small traders were the most numerous taxpayers, their complaints appeared out of proportion to their actual contributions to vat (in the early years of the Korean vat they filed about 76 percent of all vat returns but accounted for only about 5 percent of revenue). Nevertheless, they caused considerable embarrassment to the authorities and gave the vat an undeserved bad name for a time.

Preferred Solutions

All vat systems operating at present are invoice based. However, many small businesses claim it would be helpful if they had the option to account for vat on the basis of cash received and cash paid out. Some businesses operate in commercial circumstances that require them to provide lengthy credit facilities to customers. “Cash accounting” improves the liquidity of many small businessmen who have to account for vat due on invoices for which they have not received payment. It would also remove the problem of vat on bad debts.

The main features of a scheme following the EC proposal, whereby vat would be accounted for on a basis of cash paid and received, would be as follows; (1) it would be an optional alternative to the normal method of vat accounting, that is, cash accounting would not be compulsory; (2) it would cover both input and output tax; and (3) it would be available to small businesses up to some fairly generous threshold; the threshold turnover suggested for the EC is ECU 150,000 (US$187,500).

Newly formed businesses would be allowed to adopt the scheme, on application, as part of the routine vat registration procedures. Existing registered traders would need to make a written application to the authorities, and a precondition would be that they were up to date with returns and payments. Businesses would need to agree to a number of conditions (about adequacy of records and accounts) and would normally have to remain in the scheme for two years.

To prevent steadily growing small businesses having to adopt normal vat accounting at a premature stage of their development, a tolerance of, say, 25 percent could be applied to the turnover limit. This would also reduce excessive movement between the normal vat scheme and cash accounting. Businesses with turnovers already over the limit, but within the tolerance, would remain ineligible to adopt cash accounting.

These cash accounting scheme businesses, where turnovers exceeded periodic limits, would be obliged to adopt normal accounting at the start of the next accounting year, unless they could show that turnover was unlikely to exceed the tolerance during the year as a whole.

It can be argued that cash accounting schemes should not be allowed on the basis of some turnover figure but rather on the “nature” of the business. If cash sales are prevalent in a branch, cash accounting should be allowed; if they are not, accrual accounting should be the rule, even if turnover is low.

In any case, adequate records would have to be maintained. In particular, there would have to be comprehensive cash records, either by adapting existing summary records of sales and purchases by including settlement details or by setting up a cash book, which fulfilled the dual role of summarizing both transactions and individual cash movements. A clear audit trail would have to be maintained from the summary record back to the normal commercial evidence of the transactions (that is, copies of purchase and sales invoices and evidence of receipts and payments). Businesses would still have to issue tax invoices for sales to registered customers. Cash purchases would need to be supported by receipted tax invoices before input tax credit could be claimed.

Hand in hand with the receipt of payment (and not the supply) being taken as the taxable event is the regular payment of advance amounts (say, every month or each quarter), calculated on the basis of tax paid in the preceding year with reconciliation at the end of the year, that is, the business either pays a balance due or receives a repayment if its installments have exceeded the annual tax due. With newly registered businesses with no history of tax payments, a system of estimated payments against expected turnover might be adopted.

Suggestions also are made frequently to simplify the accounting problems of small businesses by allowing them to file returns less often than the regular vat taxpayer. The attractions of an annual or perhaps twice yearly return appear obvious and the EC has made suggestions for quarterly returns; however, experience shows that it is precisely the smallest businesses that have the greatest difficulty in meeting their deferred payments, including tax liabilities.

In fact, small business associations have sometimes argued for the exact opposite treatment where small traders could make more frequent contributions to their eventual annual vat liability so that they would not fall behind in their payments, find themselves unable to meet these obligations and then become liable for automatic financial penalties. The preference is not clear-cut, and it may be best to leave the smaller taxpayers on the same filing roster as other firms or allow less frequent filings, but encourage installment payments on vat owed throughout the year.

Other Measures

It has to be accepted that in many countries, both developed and developing, the standard of bookkeeping and, occasionally, the standard of tax morality, leave much to be desired. Supplemental measures of control are used in such circumstances, entailing the physical checking of inventories against invoices of purchases and the inspection of merchandise in warehouses, storerooms, and business premises. Vehicles transporting goods are, in some countries, required to carry a manifest, corresponding to an invoice and giving particulars of what is being carried, and the names and addresses of the buyers and the sellers, with the vat registered numbers. In fact, in countries where bookkeeping standards are suspect, much reliance is placed on this form of control though this moves vat administration away from being an accounts-based tax back toward excises relying on police, customs, and excise controls.

In a few countries, the tax authorities provide assistance by initially providing model account books for vat, free of charge. Given the importance of simple records in the vat, the cost to the government of such free account books is a modest investment to improve taxpayer compliance. Guidance on keeping the necessary records is considered to be a fundamental feature of the vat educational program for traders. Failure to keep minimal books correctly entails a penalty, sometimes a continuing penalty for each day of failure, which is strictly enforced by prosecution in the courts. This is in fact the main enforcement measure for vat, and, on due evidence of noncompliance being produced, the courts award a penalty against a defaulting trader.

On the other hand, most tax administrators will prefer to rely on regulations and not court proceedings. In the Chilean and some other Latin American VATs, persistent noncompliance by a trader can lead to the authorities withdrawing his license to trade and closing his premises for a week or two (or eventually, permanently). The advantage of this procedure is that it relies on administrative order and not on a laborious legal proceeding. It is a swift decision that strikes at the heart of the business, and traders will react quickly to get back into business.

In general, the special schemes for retailers work reasonably well in most European countries. They are not regarded as departures from the principles of vat made merely to suit commercial convenience, but as being so obviously necessary as to be intrinsic to any vat system because without them the system would become totally unmanageable.

See European Community, Sixth Council Directive.

Due (1984, p. 208).

“Argentina: Amendments to the Value Added Tax Act,” CIAT Newsletter (1987, pp. 5–6).

See Samuel Brittan, “Don’t Let vat Kill Off Jobs,” Financial Times (London), February 18, 1985, p.13, and correspondence on February 27, 1985, p. 21.

Approximately 35 percent of the 29,000 registered traders are assessed under the forfait scheme in Madagascar and perhaps as many as 80 percent in Niger.

European Community, Sixth Council Directive, Article 24(1).

European Community, “First Report from the Commission to the Council on the Application of the Common System of Value Added Tax,” reproduced in Intertax (January 1984, p. 25).

European Community, “First Report from the Commission to the Council on the Application of the Common System of Value Added Tax.” reproduced in Intertax (January 1984, p. 26).

European Community, Proposal for a Council Directive Amending Directive 77/388/EEC (1986).

Turkey treated this intermediate group in a special way. but within the full vat system, by requiring them to file every three months rather than every month required of the regular vat taxpayer. In Belgium, taxpayers with a turnover under BF 4.5 million can opt to file a return only once a year and those with a turnover of less than BF 20 million can opt to file every three months (instead of monthly); however, the payment of (estimated) vat is due monthly under all circumstances.

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