Effect of the Introduction of VAT in an Economy

COLLEGE OF BANKING AND FINANCIAL STUDIES
DEPARTMENT OF UNDERGRADUATE STUDIES
RESEARCH PROJECT PROPOSAL FORM
Unit number and title
Qualification
Semester Duration Fall 2018-2019
Semester Number
Assessor Dr. Omer Ali
Assignment IV Ms. Sonal
Student Name
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You are required to fill the following:
Title of the Research:
EFFECT OF THE INTRODUCTION OF VAT IN AN ECONOMY
1. Introduction or background to the research problem or issue
In order to be able to fund public services like the provision of healthcare, payment of
civil servants and the development of infrastructure, governments in developing and developed
countries must collect taxes from its citizens. According to Wallace (2015) taxation has is a
common approach adopted by governments on individual citizens, business organizations,
goods, and services with an aim of raising revenue for its operations and social equity promotion
through redistribution of the income realized after taxation. As a backup to Wallace’s
observation, Barnett and Grown (2004) pointed out that taxation was the only practical approach
to collect resources for the purposes of financing public expenditure for goods and services
consumed by any citizens. There are different types of taxes which are levied indirectly on the
citizens. These are the central sales tax, value-added tax (VAT), service tax, excise duty, and
customs duty (Omwansa, 2014). Value added tax (VAT) which is the main focus of this
research is basically a consumption kind of tax which is placed on products whenever the value
increases at each stage of their supply chain, right from production to their point of sale. The
VAT paid by the consumers reflect the cost of the product less al the costs of production
materials that have already been taxed.
Although VAT has proved to be the best approach through which governments raise
funds to support economic growth, very few economies have been able to make it in
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implementing the system to the latter. This is because of many mysterious which have been
associated with the system. For instance, the system has been associated with regressive effects.
This is because of its nature as a consumption tax and because it is calculated at a fixed rate on
the taxable commodities, the burden becomes greater on the low-income citizens than the other
groups (Kato and Tanaka, 2018, p.430). In addition to that, the VAT system has been anticipated
to increase commodity prices. Although most of the times it is treated as criticism against VAT,
the experiences of the few countries which have implemented this system already has justified
the point (Mittal and Mahajan, 2017). This is because prices of commodities in countries
operating under this system have always been slightly above the countries without it. What most
of the economies which have proved reluctant to adopt VAT system don’t realize is that the VAT
system has more positive impacts on the economy compared to the two negative effects which
have been highlighted above. This research proposes the adoption of a VAT system of taxation
as a better approach to ensuring economic growth.
2. The justification for the proposed research, i.e., why the research is needed?
The main arguments against the VAT system of taxation have always followed the two
disadvantages of this system highlighted above: first is the regressive effects of this system of
taxation (Seelkop, Lierse, and Schmitt, 2016, p.210); its nature as a consumption tax and because
it is calculated at fixed rate on the taxable commodities, the burden has always been greater on
the low-income citizens than the other groups. In addition to that, the VAT system has been
anticipated to increase commodity prices (Chege et al, 2015, p.130). This has been based on the
experiences of the few countries which have implemented this system already because their
commodity prices are always slightly above the countries without it. However, what most
countries which seem reluctant to adopt this system have considered is the positive side of this
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system of taxation and its ability to take care of the two main shortcomings associated with its
adoption. For instance, this income has proved to be an effective income generation approach
because tax evasion is highly minimized as compared to some other forms of taxation (Freund,
and Gagnon, 2017). This implies that the government gets enough revenue to cater for its
expenses like payments of civil servants, provision of healthcare and improvement of
infrastructure. In addition to meeting its expenses, the government is left with surplus income
which can be used for investment purposes. Government investment will lead to the creation of
employment opportunities for the unemployed population and that takes care of the regressive
impacts of the system since the low-class citizens will get employed (Findlay and Garnaut,
2017). Also, because of the minimized tax evasions, the government will have enough revenue to
compensate its workers handsomely and hence the slight price increments will not be felt greatly.
3. Objectives of the Research
The main objectives of this research will be to:
 Scrutinize the main disadvantages associated with the adoption of VAT as a system of
taxation within the country
 Scrutinize the main advantages associated with the adoption of VAT as a system of
taxation within the country
 Compare the main advantages and disadvantages of VAT as a system of taxation in order
to prove its worth in economic development
 Prove that VAT is an effective system of taxation whose effects on economic growth are
positive.
4. Methodology
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