Reducing Compliance costs and providing Incentives for S mall Businesses in the Standard Regime

1. Reducing Compliance costs and providing Incentives for Small Businesses in the Standard Regime Sebastian James Asia Tax Conference Manila 4-March-2010

2. Overview

3. What do we want from an MSE Tax system • Goals of an MSE tax system • Easy to use for MSEs and Tax Policy • Close to real tax liability • Ensuring graduation to regular regime • Collect some Revenue • Ensure that most MSEs participate • Impossibility Theorem – It is impossible to simultaneously satisfy all the above criteria!!!!

4. Problems with Calibration Regular Regime • If we calibrate with respect to Upper limit • Unfair for those lower down • If we calibrate with respect to lower limit • Lose incentive to graduate to regular regime Income = 20% of Turnover Turnover - Upper limit of MSE Tax system Mid-Point Lower limit of taxable income

5. Other Problems • Presumptive systems complicates the tax system • Keeping the presumptive system up-to-date • Large Taxpayers hiding under the special regime

6. Tweaking the Standard Regime • Tax Incentives/exemptions • Tax Holidays • For hiring labor • Lower Capital Gains, inheritance tax, etc • Reduced CIT • Simplified Accounting/Book keeping • Simplified VAT rules • Another option – Presumptive income rather than Presumptive Tax • Could still benefit MSEs if the presumptive income is then assessed at progressive Tax rates

7. Tax Incentives • Tax Incentives for MSEs • Tax Holiday for first few years • Tax exemption (10% of profits – Austria) • Lower Capital Gains, inheritance tax, etc • Reduced CIT • Tax breaks for hiring labor • These face the problems associated with tax incentives

8. Simplified Accounting/Book keeping • MSEs could be given the option to use simple accounting • Use simple cash book and deduct all expenses and include all receipts • Simplified depreciation rules (Deducting 100% of machinery and equipment costs eg. Georgia, South Africa, Australia) • Full Cash Flow tax (Mexico and Poland) • What to do about imputed sales ? • What to do about loans and interest ? • Could be made available for a subset of MSEs

9. VAT Simplification • Lower duration of filing for those MSEs who are liable for VAT (Slovakia, Canada, Denmark, etc.) • Easy payments options (UK) • Simplified VAT calculation (Flat Rate scheme - UK, deemed input tax credit-Japan, Canada, Bihar) • Exemption from full accrual accounting for VAT

10. Tax Administration Tools • Taxpayer Assistance and Education for MSE • Simplified Accounting • Easy Payment options • Simplified Tax filing • Simplified Forms • Easy Filing duration • Easy Audit regime

11. Taxpayer Education and Assistance • MSEs contribute little by way of taxes • However, they are potentially big taxpayers in the future • Hence as opposed to LTUs, Tax Offices oriented towards MSEs could have a different approach • More as taxpayer service centers rather that tax audit centers

12. Easy Payment/filing • Simplified forms • Optional (in India) • MSEs could elect to pay their taxes in easier installments

13. Easy Audit regimes • Audit amnesty for the first few years of filing • Lower audit rates for MSEs • Summary audit as opposed to detailed scrutiny • Limited use of field audits for MSEs • Use Presumptive systems for TA and not Tax Policy • to identify audit probability

14. Thank You