GENERAL CONSUMPTION TAXATION FROM POINT OF VIEW OF CORPORATE INDUCED COSTS

Eva Sopková

Matej Bel University, Faculty of Economics, Department of Corporate Economics and Management, Tajovského 10, 975 90 Banská Bystrica, Slovakia

eva.sopkova@umb.sk

Abstract

Current processes of integration and globalisation bring about the necessity to deal with value added tax on an academic level due to its growing macroeconomic significance and microeconomic effects of taxation on businesses. The paper discusses the administrative burden of businesses connected with paying taxes, which has not been paid much attention. The analysis of administrative requirements of paying VAT is based on quantification of measurable costs induced by VAT and calculation of the amount of VAT. Other non-measurable costs are defined theoretically. The sum of the above-mentioned costs (for 2003 and 2004) makes the total costs of paying VAT in external as well as internal forms of accounting. The result of analysing the administrative burden of the tax is quantification of the economic effectiveness of paying VAT in small, medium-sized and large businesses in the Slovak Republic. The results of the analysis were a basis of proposals to optimise the costs of paying taxes in Slovak businesses.

Key words: value added tax, value added taxpayers, induced costs and benefits of VAT taxation.

Introduction

General indirect taxation has been a part of the tax system of the Slovak Republic since

1993. The problems that businesses – VAT payers (in particular small- and medium-sized businesses) have to solve are costs resulting from taxation (so-called induced costs). These are indirect costs appearing with the need to conform to the changing conditions of the current tax system of a particular country. Based on taxation theory, these costs are part of tax burden on taxpayers. The economic indicator of induced taxation costs of businesses has not been sufficiently analysed although it is directly connected with economic decisions of businesses.

1. General indirect taxation and induced costs

By its nature, value added tax is a general tax of consumption character imposed on the end user through the price of goods and services. The mechanism of this tax does not allow each consumer who buys goods and services for final consumption to deduct VAT individually to the state budget. The payers of this tax are subjects who deliver, import and export goods and services and who collect VAT from their customers. This makes the tax indirect.

Compared to other turnover taxes, VAT has an advantage in the fact that the final share of this tax in the price of goods and services is given as a rate by law and in no case it discriminates commodities with higher added value.

B. Hamerníková and K. Kubátová (2000:371) state that the tax is not calculated, but can be determined from the tax document submitted by the supplier.

K. Kubátová and L. Vítek (1997:209) point out that VAT enables to levy tax on services efficiently, where in general, the possibility of tax evasion is higher.

VAT can fail with services where it is difficult to identify the added value, for example in financial services, postal services, health care, social services, education, sport and physical training, culture, public television and radio, property transfer and transition, property renting, or selling postal and certificate stamps. These services are usually exempt from tax (K. Kubátová and L. Vítek, 1997:209). In these cases it is impossible to subtract the inputs that belong to tax-free outputs.

The procedure is different with the taxation of exports (to non-EU countries) as these are taxable commercial transactions without the application of VAT. Exporters have right to subtract incoming tax. This is to guarantee neutrality in international trade, because the tax is collected in the country of consumption. This is the principle of taxation according to the country of destination applied with VAT.

Imports of goods and services are considered from two points of view. If goods and services are delivered within the EU (between taxpayers registered in their respective countries), this is a tax-free delivery. If deliveries are from other countries (so-called third countries), the imports are levied the VAT of the supplier´s country. Such taxable transactions apply a tax principle according to the country of origin. The basis for calculating VAT comprises also duties paid to the customs bodies, and/or excise tax if the goods are subject to it.

Several authors (Kubátová, 2000:198–201; Lenártová, 1999:196) also point to other positives of general consumption tax (VAT), in particular that VAT is a stable income for the budget and thus a reliable yield for the state. In the long-term, the share of VAT yield on the tax income of Slovakia´s state budget has not dropped below 40% and together with selective consumption taxes it makes more than 60% of tax income of the central budget.

On the other hand, some authors (Kubátová, 2000:200, Schultzová, 2002:46) also point to the administrative requirements of VAT regime as the main argument against the system of taxation through VAT.

The costs of businesses related to paying VAT are called indirect administrative costs. The Slovak equivalent for the term “indirect administrative costs” or “induced costs” is “costs of adjusting to the tax system” in the private sector. Typical indirect administrative costs are classical measurable costs, e.g. cost of labour connected with internal recording and calculating taxes, cost of training, cost of special literature, cost of hardware and software, cost of archiving and cost of external accounting and tax services.

In calculating the tax burden for a VAT taxpayer, also the amount of the paid tax is considered (so-called cash-flow costs). The sum of total costs of the tax system of businesses comprises also psychological cost of taxpayers (J. Vítková, J. Nemec and K. Půbal, 2002:1–7). These are costs connected with attitudes and opinions of businesses on taxation). It is difficult to quantify them and they often have a hidden character.

In examining the economic effectiveness of paying VAT, also potential benefits are considered (cash-flow, managerial benefits and others), which lower the amount of the total induced costs. The costs calculated in this way make the social costs of taxation of businesses.

2. The results of analysis of cost effectiveness of VAT

The main goal of the research was to calculate the costs of businesses on the basis of analysis of induced costs and to compare Slovak businesses by size.

The current status in this area is a result of historical development and gradual changes, which is why one of the research methods was historic-logical method. The other methods that we used were abstraction and comparison. To obtain objective data we chose a questionnaire as one of exploration methods, mathematical-statistical methods, induction, deduction, causal analysis, classification, relational analysis and synthesis.

The responded set was consisted of 55.26% individuals and 44.74% legal entities – VAT payers.

The size of the sample was determined by a selection from the basic set accounting for 200 respondents. The selected set made 0.045% of the basic set (114 respondents) with an added reserve due to not-returned questionnaires. The selected set altogether accounted for 200 respondents. To qualify the respondents for the set, we used two features:

- legal form of business of VAT payers

- the share of individual VAT liable deals in total taxpayers´ turnover.

According to specific criteria of evaluation we assessed the sample as representative.

We expected that the transition to the European rules of VAT taxation would increase the induced costs for businesses (in particular small- and medium-sized businesses), which was also suggested by the results of preliminary research.

Based on the results of analysis of classical costs induced by VAT in 2003 and 2004, we recorded a year-to-year increase of measurable costs in internal accounting for all businesses by 38.42%. The highest increase was recorded in cost of training, 70.15%, cost of hardware and software, 50.94%, and other costs 35.54%. The respondents confirmed a lower increase of labour costs, 21.80%, in the questionnaire. When summarizing the classical induced costs in internal and external forms of accounting for the years 2003 and 2004 we found out that the costs under study rose in all businesses. The yearly increase was the highest in big companies (by 43.62%), followed by medium-sized businesses (by 21.46%), and it was the least was in small-sized businesses (by 17.66%).

An overall result of analysis of the induced costs was a finding that businesses do not specially record these costs. To quantify them, it was necessary to describe all kinds of classical induced costs and set a proper ratio of adding them to the total sum of costs.

We quantified the cost of VAT taxation as a ratio of social induced costs of businesses to the due amount of value added tax (separately for 2003 and 2004).

We supposed that the cost in small businesses was twice as high as in the other investigated businesses, which we considered, according to this criterion, the least effective process of VAT taxation.

Based on the research, we found out that in the category of small businesses VAT taxation induced 44 Slovak crowns of social costs on 100 crowns of paid value added tax. In the category of medium-sized businesses 100 Slovak crowns meant 19.60 crowns of social costs and in big companies it was 8.30 on 100 crowns. For prudence reasons, we used the figures from the year 2003, when the conditions of VAT taxation were more stable.

According to this indicator of costs, the process of VAT taxation is the least effective in the category of small businesses (the value of this indicator is 0.44 Slovak crowns, or 44%). Its value for medium-sized businesses was calculated at 19.6% and for large companies 8.3%. The burden of administrative costs in small businesses is more than five times higher than in large companies, and double when they are compared with medium-sized businesses.

Conclusion

The need to solve the current problems related to value added tax is pointed up by its significance as a source of income for the state budgets of individual countries. Value-added tax is also used as a source of finance for the European Community. Moreover, this tax plays an important role in international trade and supports globalisation trends in Europe and in the world.

The legal obligation of businesses to conform to tax laws in force induces a variety of costs that have not been examined in particular theoretical or practical research under the conditions of the Slovak Republic.

Businesses in the Slovak Republic, especially small- and medium-sized businesses, have to keep analysing in detail the system of VAT taxation. Only a thorough knowledge of changes in legislation and the economic impact of general indirect taxation can help to optimise taxation processes and make the behaviour of businesses rational and effective in this area.

References

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