VAT is an important source of revenue collection for the government. It creates greater scope for the government to raise taxes when it is not indicated on the invoice issued to the buyer. It is also technically a better alternative for consumers as they do not have to bear the entire cost of the tax. This is because VAT is levied on every stage of supply chain according to the value added at that level.

Criticisms of Value Added Tax

Critics oppose VAT due to the following reasons:

• Regressive nature: VAT is primarily criticized because it is considered to be a regressive tax, wherein the burden falls on the personal-end consumers rather than the businesses. Moreover, since different goods and services are taxed at differential rates, it encourages regression.
• Collection issues: The revenues from value added taxes tend to be lower than that from other forms of indirect taxes, such as sales tax. This reduces the funding available with the government, which might encourage it to increase prices. Moreover, VAT is difficult and more expensive to manage and collect.
• Encouraging industrial disparity: Certain industries, such as small-scale services tend to have greater VAT avoidance, especially where cash transactions prevail. VAT is indirectly disapproved of encouraging this avoidance.

Finally, VAT(Value Added Tax) is opposed as it is believed to encourage fraud. This is because since VAT is not applicable on exports, the VAT refunds or tax-offsetting for the amount charged creates great scope for VAT fraud.

For instance, in Europe, VAT is held responsible for "carousel fraud." In such a situation large volumes of valuable goods are transported between two companies within EU member states. The first company (known as 'missing traders') that owes VAT files bankruptcy without paying. The other company (known as a 'pump') acquires a right to reclaim the VAT and pays the amount directly from its national treasury. In fact, the British treasury has become a large victim of such a fraud.

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