Study On VAT Loss In China

Because of its neutrality and efficiency, VAT is collected in more than 130 countries. Nowadays, VAT accounts for the largest proportion in the whole tax revenue and acts a regulatory role in Economy. Since the reform of tax system in 1994, VAT has played an important role in promoting sustained development of Economy and acquiring revenue timely. The revenue of VAT has risen to 1289.46 billion in 2006 from 233.86 billion in 1994. However, after the reform of VAT in 1994, rampant crimes in VAT have resulted in great tax loss. Even after"Golden Tax Engineering"Stage II, the criminals still acted tax evasion and tax fraud by means of VAT dedicated covering warrant withheld by the customs, transportation invoices, purchasing invoices of waste and old materials, and purchasing evidences of farm produce (which are named"four little invoices"). In the 9 biggest tax crime cases of 2005 exposed by State Administration of Taxation, four took the advantage of"four little invoices", in which the biggest one is"Hei Jin Ji"case.VAT is a main tax in China, but there are serious problems in the VAT system, which has resulted in great tax loss and held back economic development. Furthermore, the methods and channels of tax evasion and tax fraud have changed basically, which has a wider range and shady tact, so they are difficult to investigate. The problem of tax loss could not be solved only by"Gold Tax Engineering". Analysis of VAT loss can widen the view of tax reformation, and summary of the problem of VAT loss has a great role in the innovation of tax system.Based on the concept of tax loss, this paper explores the theoretic models, analyzes the influence of tax loss, and constructs the research framework of VAT loss in China by using game theory and the theory of institutional economics and information economics, which makes annotation of the efficiency problem of VAT. This paper researches the core characteristic of VAT in a new view, and tries to explore reformation modes of VAT which is fit for China.This paper defines the concept of tax loss and clarifies the difference and relation of related concepts. Tax loss is the difference of theoretic tax and actual tax. And it is important to clarify the difference of the concept of tax evasion, tax fraud, tax avoidance and tax saving from tax loss.Tax loss has great influence in five ways. The first is the influence on GDP, namely whether or not the act of tax evasion will promote the development of GDP. The second is effect of resources allocation, namely whether or not the act of tax evasion will distort the market signal and result in efficiency loss. The third is effect of revenue allocation, namely whether or not the act of tax evasion will result in unfair of revenue allocation. The fourth is the influence on fiscal revenue. The fifth is the influence on VAT collection and management.Economists have made researches on tax loss in different direction. Allingham and Sandmo developed a model of expected utility, which showed that the increase of inspection probability and penalty will result in the decrease of tax evasion. The research in game theory also indicated that the more the penalty, the less the probability of tax evasion and that the more the cost of inspection, the more the probability of tax evasion. The model of behavioral economics considered that because taxpayers regard taxes as loss, they will make every attempt to cut the tax, and even use the method of tax evasion. If there are some leaks in tax system, taxpayers will choose tax evasion, and if the acts are not found, the attraction of tax evasion will become greater. On the other hand, if the taxpayers were seriously punished because of tax evasion, the attraction of tax evasion will come down.There are three causes in tax system which results in tax loss. The first one is the faultiness in VAT system. There are some leaks in VAT system, which are originated because of objective diversification, difficult acquisition of invoices, imperfect of taxation range, break of deduction chain between general and petty taxpayers, insufficiency of tax drawback and etc. The second one is irregularity of tax system, which includes opaque of tax law , frequent change in tax system and bad maneuverability. The third one is the loss of justice and rationality of tax system.Insufficient supply of informal institution is another reason that causes VAT loss in China. 1) There is lack of culture which regards justice of tax as its core in China. 2) There is lack of institutional environment which isn't influence by privileges. 3) There is lack of governance tradition in which rule of law is higher than rule of man. 4) There exists vacuum of ideology in some areas.Moreover, there are some factors of tax collection and management that cause VAT loss in China. The first one is information asymmetry between taxpayers and tax authorities. The second one is information asymmetry among the taxation offices. The third one is the low efficiency of collection and management of VAT. The fourth one is imperfect right of collection and management. The fifth one is rent-seeking activity in tax management.Based on global experience, this paper develops some idea on governance of VAT loss in China. 1) Optimizing tax environment, constructing tax environment with the core of faith, and enhancing the awareness of rights and obligations. 2) Simplifying tax system, reducing tax burden, enlarging collection range of VAT, limiting tax concessions and quickening the transition of VAT. 3) Strengthening tax collection and management, constructing new mode of collection and management, improving tax system and tax measure, and reinforcing information system. 4) Improving taxation service, respecting the rights of taxpayers, and reducing the taxation cost of taxpayers.