VAT collected but not paid to the authorities
(vii) Carrousel fraud
Fictitious transactions of goods are made in order to get refunds on allegedly pre-paid VAT. However, the goods are only purchased and resold fictitiously to a company in another state. As a consequence, the operator claims a refund without having paid VAT. These fictitious supplies may be advanced through the use of numerous shell companies creating the illusion that goods are being supplied to another state and back. The fraud will result in a mismatch because no supply will be recorded in the states of the fictitious purchaser.
According to published data (May 2006), the loss of VAT in the European Union would range between ^60 billion and ^100 billion per year (quoted in the article by Fabrizio Borselli in International VAT Monitor, September-October 2008). In some member states, the loss of revenue due to carousel fraud would reach 10 per cent of the total VAT revenue.
(viii) Cloning Fraud
The modus operandi is that a person carries on business without registering himself but by using the VAT registration number of someone else. The dealer disappears without filing VAT returns as he obviously cannot file using the hijacked VAT registration number.
(ix) Artificial disintegration of firms
To remain below the threshold limit some firms break themselves into two or more while the main firm controls financially the other firms. The other firms in effect become the dummies of the main firm.
VAT Gap is the difference between the net theoretical tax liability and actual VAT revenue. It represents VAT fraud together with avoidance and non-compliant activities. To estimate VAT evasionm one has to take taxable sales, purchases generating tax credit and investment generating tax credit, which are all estimates. With these estimated figures the theoretical tax base can be estimated. Then the amount of potential receipt is calculated by applying the general rates to the theoretical tax base. This methodology works well if the VAT is a single rate. With several rates, the VAT Gap is more difficult to calculate. With all the anti-evasion measures in place, it has been said authoritatively in the context of EU that the fight against VAT evasion is far from being won (Fabrizio Borselli, International VAT Monitor, September - October 2008, p.339).
It is far from true that GST/VAT is less prone to evasion compared to Turn-over Tax. With all the examples of evasion in EU, South Africa, Canada, Brazil, and Australia which are reported regularly in International VAT Magazines, our country must develop anti-evasion measures to match the wits of the evaders. The so-called self-policing mechanism does not work so effectively, though theoretically it is claimed to be so.
The writer is member, Central Board of Excise & Customs (retired)