FRAUD

Governments are losing billions of euros in value added tax(TAX) revenues because of tax fraud and inadequate tax collection systems.

The VAT gap is estimated in billion $USD

Revenue Losses due to VAT Gaps

Countries are losing billions in value-added tax (VAT) revenues because of tax fraud and inadequate tax collection systems. The VAT Gap is the difference between what should be collected and what is collected. The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations.









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EUROPE

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USA

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INDIA

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UK

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FRANCE

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CANADA

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ARGENTINA

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NETHERLANDS

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AUSTRALIA

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VAT Fraud

What makes VAT fraud possible?

The VAT fraud is the fraudulent use of the VAT rules so as not to repay the tax due to the State or to receive a fictitious claim against the State. Therefore, in order to understand the mechanism of VAT fraud, it is necessary to expose the schemes of such tax. The rules may vary depending on the nature of the operation performed by the subject. There are a number of contributing factors which combine to produce a system where fraud is possible:

  • Lack of speed makes VAT fraud an issue! The delay between a merchant collecting tax from a sale and remitting it to the Tax Authority
  • Lack of communication between tax authorities in different countries.
  • Lack of accurate data on fraud
  • By using a system of taxing on invoice rather than on settlement, the fraudsters are able to receive claims for credits before the seller has deposited the VAT.

    VAT FRAUD TYPES


    • 1

      Classification Fraud

      It occurs in multi-rate VAT situation where dealers take advantage of multiple rates by classifying goods carrying higher rates as goods carrying lower rates.

    • 2

      Domestic sales disguised as exports

      Traders sell goods and services on a domestic market but claim to have sold them on an export market.

    • 3

      3. Shadow economy frauds

      Genuine businesses with a turnover above the VAT registration threshold that deliberately do not register for VAT

    • 4

      4. Disintegration

      This involves artifial fragmentation of business into smaller units to keep the turnover below the threshold limit and avoid registration under VAT.

    • 5

      5. Undervaluation of output

      This is the most infamous form of evasion. Here, the unit declares a price that is lower than the actual usually, the tax payer gets into an understanding with receiver

    • 6

      Missing trader intra-community

      Here refers to European community frauds- where fraudsters for VST, buy goods VAT free from another

    • 7

      Repayment Fraud

      Where fraudsters register for VAT, make false claims for repayments and then abscond. This fraud is similar to a missing trader fraud.

    • 8

      Suppression Fraud

      Where genuine businesses with legitimate trading activity perpetrate a fraud by understating a portion of their sales or by falsely inflating their claimsfor the VAT on purchases to reduce tax liability

    • 9

      Partial exemption

      Partial input-tax credit is required to be calculated when tax-paid inputs are either used in a manufacture partly of tax-paid.

    • 10

      Mis-Declaration of quantities

      This is resorted to whenever there is little scope of undervaluation and where counting or measurement of quantity is prohibitively problematic task.