VAT is a tax on consumption. It is collected in stages by the businesses (or intermediaries) and is fully borne by the final purchaser. As a consequence, VAT is a transactional tax with the potential to impact all transactions with suppliers and customers.
Measuring risks is often based on the balance between output VAT and input VAT and not on the total amount of VAT/GST throughput (also called VAT ‘under management’).
The question is often asked what risk management even has to do with VAT/GST. The reasoning behind this question is that VAT/GST is typically cost neutral for most businesses: “a cash in and cash out” scenario. However, every indirect tax function knows that deductible input VAT and liable output VAT have to be managed separately to avoid substantial VAT assessments, penalties and interest payments.
It is a risky business to monitor only the balance between output VAT and input VAT.
Neutrality can only be achieved – better is the word ‘earned’ – if certain formal and material requirements are met – Why Manage Indirect Taxes?