Electing Into a Value-Added Tax: Evidence From Ontario Microentrepreneurs
Canadian Tax Journal/Revue Fiscale Canadienne, Vol. 66, No. 4, 2018
48 Pages Posted: 28 Jan 2019 Last revised: 30 Jan 2019
Date Written: December 13, 2018
Why would an entrepreneur elect, on behalf of her business, to comply with a tax that is not required? A little-studied provision embedded in the majority of value-added tax (VAT) statutes worldwide permits otherwise exempt "small suppliers" (typically defined as businesses with annual revenues below a specified registration threshold) to register voluntarily for, collect, and remit VAT on their sales to customers. Economic models of the input credit mechanism that refunds registered sellers for the VAT that they pay on inputs show that incentives to register voluntarily for VAT increase as small suppliers (1) purchase more of their inputs from registered firms (the input channel) or (2) sell more of their output to registered firms (the customer channel). Promoting such "formality chain effects" through voluntary registration can improve the efficiency and self-enforcing properties of a VAT. In the real world, however, many VAT registration thresholds are far lower than the level recommended by economists. Low VAT thresholds imply that only the smallest businesses, which often bear disproportionately high VAT compliance costs, are eligible to opt in. But the question of whether formality chain effects are relevant for the key taxpayer population in low-threshold settings -- microentrepreneurs -- is an open one.
To address that question, this article presents results from a hybrid (quantitative and semi-structured qualitative) survey of nearly 100 Ontario-based small suppliers (defined, under Canada's federal goods and services tax statute, as businesses with annual revenues below Cdn$30,000). Within this sample, small suppliers' voluntary registration behaviour was broadly consistent with the presence of customer-channel formality chain effects. However, patterns consistent with the input channel were absent, and qualitative responses of unregistered participants cited trepidation about complexity at levels that were not borne out by the reported experiences of participants who had registered voluntarily. These findings suggest that, even in a jurisdiction with a very low threshold, voluntary registration has the capacity to promote production efficiency through formality chain effects. To the extent that this capacity is restricted to he customer channel owing to unregistered small suppliers' exaggerated fears about the complexity of registration, tax authorities should consider measures to correct such misperceptions through outreach, education, or pilot programs that offer limited subsidies for voluntary registration.
Keywords: Compliance, Value-Added Tax, GST, Indirect Taxes, Small Business, Registration
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