Tax Break

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Archive for the tag “Value-added tax”

The Unsatanic Taxes

funnyroadNobody who has read Salman Rushdie’s classic ‘Midnight’s Children’ can be indifferent to the juxtaposition of India and Midnight in a phrase or sentence. So, the recent announcement that India’s new GST law (VAT by any other name would smell as sweet) would come into effect, amidst much fanfare, at midnight on July 1 was enough to make my heart flutter like a punkahwallah’s punkah.

The world’s biggest democracy has finally joined the vast majority of the globe’s tax-setters in a cross-twenty-nine-state system that, when the technological problems are sorted out, should improve India’s tax-raising efficiency and, thus, help that great country in furthering its economic growth.

That is not to say that VAT is the Mother Teresa of all taxes. Its biggest problem is that it is regressive –  it taxes consumption at the level of the poor-man-in-the-street who, the poorer he is,  spends a higher proportion of his income on surviving. This is traditionally combatted by lower rates or exemptions on basic things like food. Indeed, India – in keeping with its tradition of making everything as complicated as possible – has introduced five rates of VAT  plus a stratospheric concoction for dealing with untouchables like luxury goods and tobacco.

Of course, there will still be those who manage to get round the tax, legally or otherwise. Time will tell whether devious residents latch onto the ubiquitous Carousel Fraud phenomenon (involving the import and export of the same goods multiple times – a bunch of Brits were caught a few years back when they got lazy and stopped changing the plugs on phone chargers between France and England). And then there was the hard-to-believe wheeze of the Spanish theatre that sold VAT-exempt carrots for admittance to its performances together with a worthless piece of paper called a ticket. The only problem (apart from the Spanish tax garrotters catching up with them) was that hungry patrons couldn’t prove their right to re-entry to the auditorium after a toilet break during the intermission.

At the end of the day, VAT works. One of the few countries that does not seem to agree is the ‘biggest’ democracy (as opposed to the ‘biggest democracy’). A few years ago, at lunch at a conference in Berlin, a group of American experts were discussing ways of plugging the impossible US deficit, coming up with all sorts of supply-side ideas. Thinking that V.A.T was the sort of acronym (actually sayable, like M.A.D – Mutual Assured Destruction) that Americans would die for (especially when said with an English accent), I suggested that imposition of such a tax would surely solve all their problems. I was completely frozen out. V.A.T is a dirty acronym in the eyes of Uncle Sam. My luncheon partners looked like they wanted to drag me in front of Senator Joseph McCarthy’s Un-American Activities Committee. The irony, of course, is that while V.A.T undermines the ‘redistribution of income’ philosophy of most of the ’red’ nations (such as Britain and Europe) imposing it, the American belief in ‘equality of opportunity’ is completely at peace with its workings.

The Indians still have a long way to go. Their direct tax system leaves much to be desired – the witch-hunt of Vodafone to cover the seller’s capital gains in an offshore purchase a while back, and its treaty-defying Dividend Distribution Tax being but two examples of the rot.

As Rushdie put it in Midnight’s Children, ‘I admit it: above all things I fear absurdity.’ Thankfully, his beloved India is finally taking steps in the right direction.

Risks of the import/export/import business

The crooks used to die laughing

Back in the sixties when my all-time superhero,  Batman,  used to dress like he was going to a neighbourhood Halloween party, actors Adam West and Burt Ward would issue warnings to stupid children not to try any of their stunts at home. That was sound advice.

While they had the full attention of the little weirdos they might also have told them that, when they grow up, they shouldn’t try crime. Because, while stupid people might get a real kick (and “pow” and “splatt”) out of crime, when they get caught (and stupid people who think they can swing across skyscrapers with capes catching between their legs DO get caught) it really messes up their social life.

I reckon it is precisely these sorts of wackos who  go in for VAT fraud. VAT fraud is very tempting. As will be seen from my “VAT Fraud for Dummies” below, it carries the very real advantages over regular aggravated burglary of not involving physical violence and offering theoretically unlimited gains.

It’s a dog’s life sentence

The problem is that when you get caught, as happened to a gang in England recently, the judge tends to get enthusiastic when it comes to sentencing. One genius  copped a 17 year sentence last month. For any Americans reading this, British custodial sentences compare with American ones like dog lives compare with human ones – so for 17 years read 119 years (and for VAT read an indirect regressive tax designed to fall on final consumers and hated by every Yank who hates Barack Obama).

The most popular form of VAT fraud operates best in the European Union. This is mainly because the Europeans, as a matter of policy, trust each other. They trust the Greeks, the Italians and the Spanish just as much as they trust the Germans and the French – and that is official.

In describing “Carousel” fraud I will actively omit a few essential steps so that, just in case some fat con sunning himself next to a pool on the Costa Del Sol with a cocktail in one hand and his computer in the other is reading this, he will NOT be able to commit the crime of the century (and then get caught).

It starts in, say, France where a member of the syndicate (you need a lot of goons for this game which increases the risk of someone singing) exports mobile phones to Britain. It is almost always mobile phones or similar devices although carbon credits have recently joined the list. The French exporter does not charge VAT because, as an export sale, it is subject to zero rate VAT. In Britain – where VAT is not charged at the port because the British and French are in bed together in the EU lovefest – the VAT registered purchasing company  on-sells the goods with a profit to another British VAT registered company charging whatever rate of VAT Britain’s coalition government is charging that month (for VAT fraudsters – the higher the better – so bring it on, Dave). The first British company then conveniently forgets to pass over the VAT to the UK authorities and ultimately “disappears” with the VAT it has received from the next company which is its accomplice. So far, apart from breaking the law, nobody is better off. From here on, depending on the level of “sophistication’ of the perpetrators the goods may now pass through a number of “legitimate” companies in the UK charging and reclaiming VAT until they reach the final UK company that makes it all worthwhile (until they get caught). That company exports the goods to France issuing a zero rate VAT invoice (“There’s a hole in m’ bucket, dear Liza, dear Liza..”). Under VAT law, the exporter can now reclaim the VAT it paid to the company it purchased the goods from. The final upshot is that the first UK company has disappeared with cash supplied by the syndicate but ultimately “refunded” by the British government. Best of all, the whole process can start again with the French company exporting to the UK – so the same stock of goods can be sold several times and multiples of the VAT amounts “lifted”.

In the early days the tricksters used to, at least, play the game. There was a stock of mobile phones that moved around the market. Then somebody woke up to the fact that, unless you were really unlucky and got hit with an audit, nobody ever needed to see the goods – but to be on the safe side they packed up boxes in warehouses with bricks and a layer of phones at the top. Later, it appears that even the cost of the bricks and their transport between companies bothered them so many did away with the goods altogether.

You can’t put a round peg in a square hole

This is nicely reflected in how two such frauds were blown in recent years. A while back HMRC did an audit on a stock of mobile phones in England and discovered that their chargers did not have British square-pinned plugs and were hence unsellable in England. More recently, a case was uncovered because the invoices were for models of mobile phones that, due to a manufacturer’s delay, had not yet reached world markets. As I said above, these are the same stupid morons Batman and Robin were talking to.

You will be pleased to know, however, that the great bureaucracy, the EU, has not stayed silent. Several years into this mess (it is estimated that VAT fraud runs into the billions) the EU Commission  finally proposed two weeks ago that, for a limited period only, certain very specific categories of goods (including mobile phones) should be accounted for using the “reverse charge mechanism. This is a method whereby, broadly, VAT is not charged by the seller but is instead accounted for by the purchaser until the final sale to the consumer.

Could somebody tell her that she is supposed to be DOING the frisking?

This reminds me of  US airport security since 9/11. Every time I take my shoes off in a US airport so that they can check for explosives similar to those once concealed by a British citizen boarding a flight, I think of two things. Firstly, the only deadly thing about my shoes is the odour. Secondly, that there is a terrorist who has just walked through security with a cleverly hidden device chuckling to himself about the stupidity of Homeland Security in thinking  he would try the same schtick twice.

But VAT fraudsters are not terrorists with an ideology and a mission. They are greedy fools most of whom are lucky to be less stupid than the European bureaucrats sent to stop them.

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