Government’s main task is to protect human rights, properties and provide security in cases where private sector can’t make it. Yet other responsibilities such as national security, protection of the natural environment, development of hard (road, transportation, electric and water supplies) and soft (education, health, law enforcement) infrastructure must be also handled by the government because their cost of service cannot be charged individually: when one person receives the service the second benefits automatically.Taxation is a way of covering government expenses to build the infrastructure and improving the quality of public services. For creating funds the government collects different types of taxes. The introduction of value added tax (standard rate of 10%) is one of them and is considered more profitable than sales tax. Value added tax differs from sales tax in that the amount of added value can be registered at all levels of production and services. Moreover, a taxpayer pays only for the value that he or she added. As the registration process of added values improves, economists can work with more precise numbers, which in turn results in accurate income tax calculation.Value added tax (VAT) was first adopted 60 years ago in France, then in other countries. In Mongolia, it replaced sales tax in 1998. Yet even today we are not quite getting accustomed to this tax. The average Mongolian citizen considers VAT as more of an obstacle rather than a contribution to society and economy. Our government is even talking about going back to sales tax. The government’s current stance concerning VAT and its future outlook is one of the hot topics in today’s Mongolian business community.Everything is taxed: your property, your products, services, your consumption and your children’s inheritance too. The tax-collection process itself is costly. Unless the taxpayers do not look out for government growth and unless they demand transparency through regulation of the spending of the budget by the state, the general tendency of any government is to expand in size. And ours is not an exception. It is in fact the classic example of an oversized government. (The size of a government is determined by percentage of state budget spending in the gross domestic production. And in Mongolia this number is larger than half of it.)We erroneously translate the term “value” as “cost.” As a result it causes more confusion in understanding of its legal terminology. Wrong understanding produces wrong actions. The main idea behind VAT is to give estimation of the value created by each company at each stage of value chain creation. So the tax collected by the government from part of the value created is called value added tax. Bread baker, when purchasing flour obtains a document that says that the flourmill paid VAT, and declares it when he pays VAT to the government from the selling price of the bread. Since the price includes VAT paid by the flourmill, the government recompenses him. As a result he pays tax only on the part of the value he created in the process of bread producing. There is a lot of time lag between payment and compensation.However not the all value chains are taxed because many players in the market are exempt from this tax or not all are VAT payers depending on industries or the size of turnover, kind of products and services etc. Since not every one pays Value Added Tax, it is losing sense and almost all companies and dealers are evading it and prefer cash transactions. So makers of the same product have different, tax environment and unfair conditions, which destroys fair competition. By law, Mongolian companies with up to 10.0 million tugrogs a year in turnover are exempt from VAT. So every company has an interest to remain small.The very purpose of VAT, which is to disclose shadow economy, but it keeps distorting it instead. Our State Great Khural carries on issuing new laws on taxes and payments. These are shortly followed by more laws that introduce exceptions to companies and groups of individuals. Ironically Value Added Tax has turned into the clearest of laws in Mongolia. For example, companies that export products from the country are exempt from VAT. Most mining companies fit into this category. When purchasing a product or a service they must get all their tax payments back. So our government began to not collect but pay taxes. Complaints and justifications followed and they concluded that if there is no final product produced, payment for VAT will not be given back. Now laws are issued without fully thinking through, and pose as obstacles to those who do create values.Many say that one of the particularities of value added tax or consumer tax is that the rich, who use 10% of their total income, gain profit while the poor, who use all, get punished. In many governments, the collection process is more expensive compared to the gained profit from tax. If a law does not fulfil its initial function or cannot be implemented, it means that it is not its right time and that lawmakers and law-enforcers should evaluate twice.
Unoodor
2011.04.27 Translated by J.Ariunaa