Taxation and Economic Development among Pacific Asian Countries

By Richard A. Musgrave; Ching-Huei Chang et al. | Go to book overview

countries is not so apparent. Many countries may be blessed with an ample supply of competent economic analysts available for cabinet positions, but not many (including, perhaps, the Indonesia of the future) can count on them staying in office long enough to duplicate the achievements of the Indonesian economic team of 1970-1990.


Notes
1.
As in the Benelux countries in the EC, VAT liability may be deterred for machinery imported for projects with long gestation periods. The Indonesian system allows deferral for one to five years or until the project begins commercial operation. In addition, raw materials and equipment imported for use in export manufacture may qualify for suspension of VAT, which for all practical purposes amounts to exemption. All departures from universal application of the VAT to products are summarized in Directorate for Indirect Taxes, Department of Finance, "Special Provisions Regarding Value-Added Tax" (Jakarta, May 1987).
2.
These modifications were all adopted in 1986. Goods eligible for this treatment include imported components for low-cost housing, imports by the armed forces, and water.
3.
The destination principle VAT taxes value-added, at home or abroad, of goods that have as their final destination the consumers of that country. In this case, exports are zero-rated, but imports are taxed. Under zero-rating systems for exports a zero tax rate is applied to the sales of exports. Upon presentation by the exporter of proof of VAT paid on purchases, VAT is refunded on all export transactions. In contrast to this is the "origin" principle, wherein exports are taxable but imports are exempt. The origin principle is compatible with the income-type VAT but not with the consumption type. The destination principle is compatible with the consumption-type VAT but not with the income type. By 1992, EC countries had made a fundamental alteration in the treatment of traded goods under the VAT: All member nations adopted the origin principle. The tax-credit method of collection allows firms to subtract taxes paid on their purchases against taxes due on their sales, remitting the remainder to the treasury each period. With this method, firms need not directly calculate the value added each period and then apply the applicable tax rate to determine tax liability.

The consumption-type VAT taxes only consumption goods. Capital goods are excluded by allowing taxes paid on their purchases to be credited against taxes due on sales. An alternative to the consumption VAT is the income-type VAT, which has for its base all types of income including capital income. Among LDCs, only Argentina, Peru, and to some extent Turkey have chosen the income-type VAT over the consumption type, although the early Colombian VAT ( 1966-1984) was of the income type.

4.
Cattle feed and poultry feed produced by domestic firms are not subject to VAT but, strictly speaking, are not exempt as such. Although there are no exemptions by product category, VAT is not collected on the sales of "small" enterprises (firms with an annual turnover of less than US$5,000 or total capital at level less than US$8,000).

-41-

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