VAT would be a massive administrative burden

Like other tax systems, even a simple VAT—one that exempts few goods or services—has compliance risks and, largely as a consequence, generates administrative costs and compliance burden. For example, all of the study countries reported that they devoted significant enforcement resources to addressing compliance. Businesses whose taxable purchases exceed their taxable sales are entitled to a refund under a VAT, which makes VATs vulnerable to fraudsters creating phony invoices in order to falsely claim refunds. Also, similar to other taxes, adding complexity through exemptions of some goods or services and reduced tax rates generally decreases revenue and increases compliance risks because of the incentive to misclassify purchases and sales. Such complexity also increases the record-keeping burden on businesses and increases the government resources devoted to enforcement.

Canada’s experience administering a national VAT along with a variety of provincial VATs and sales taxes demonstrates that multiple arrangements in a federal system are feasible, but increase administrative costs and compliance challenges for both the governments and businesses. Businesses, particularly retailers, in provinces with a sales tax face greater compliance burdens than those in other provinces because they are subject to dual reporting, filing, and remittance requirements.

Australia, Canada, and New Zealand, all with relatively new VATs, built on preexisting consumption tax administrative structures to implement the new tax. Nevertheless, they devoted considerable resources to educate, assist, and register businesses and implementation took from 15 to 24 months. Both Australia and Canada provided monetary assistance to qualifying small businesses to help meet new bookkeeping and reporting requirements. Despite their efforts, Australia and Canada had some difficulty getting businesses to register for the VAT by the implementation date.