Good morning dear teachers and students

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Thesis pre-defense presentation on:

By: Undarmaa.E Adviser: Prof. Yang Zhengyong

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Outline
Introduction
Imposition and characters of Value added Tax in Mongolia

How is VAT computed and paid?

Empirical Study Problems of VAT system

Suggestions
Conclusions
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Introduction
Scientists consider VAT as the best tax which collect revenues and widened greatly in humans history. Today almost 200 countries such as most countries of Europe, especially European Union, Japan, India, Indonesia, Brazilian, China, Africa and America impose VAT and pay it to state budget. Maurice Laure was first to introduce VAT in 1954 as a consumption tax. In 1968, service tax united with local taxes which accessed for retail sale and become a versatile tax on retail sale.
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Introduction(cont.)
In Mongolia, VAT is introduced on July 1st of 1998. First years VAT rate was 15% after charged at 10% from 15% by the law of January 1st of 2007. Zero rating for exported goods and services Reason of introducing VAT in Mongolia. VAT can be reliable source of state budget Reduce the burden of income tax Oppose to black economy Coordinate tax system to the international standard Number of the Value Added taxpayers was 13772 in 2010.
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Imposition and characters of Value added Tax in Mongolia

In Mongolia, t( selling) -t( purchasing), indirect deduction method or invoice method is used. Under the invoice method of collection, each seller charges VAT rate on their output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. For a certain company, VAT based on notes of purchasing and sales. In other words, it defines the taxation amount which measured the difference between purchasing and sales with VAT. In Mongolia, tax report has to report monthly. Sales> Purchasing minus payment Purchasing> Sales excess payment and VAT shall be refunded to the taxpayer.
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How is VAT computed and paid?

RMS sells raw material for 1000MNT.Including 10% VAT, manufactures pays 1100MNT. manufactures
Manufactures uses raw material in production, along with labor and overheads and sells the product to wholesaler for 4400MNT.

Retailer

Wholesaler pays to manufactures 4400MNT.(incl uding VAT). Then sell to Wholesaler retailer.

Retailer pays the wholesaler 6600MNT.(inclu ding VAT). Then sell to consumer

Retailer charges the consumer 8800MNT. (including VAT). Vat payment is 800, 10%of consumer pays purchase

Consumer

Raw material seller

Sales 1 Raw material 2 1000

VAT of sales/2*10%/ 3 100

Purchase 4 0

VAT of purchase/4*10%/ 5 0

VAT payment /3-5/ 6 100

Manufacturer
Wholesaler Retailer Sum of these payment

4000
6000 8000

400
600 800

1000
4000 6000

100
400 600

300
200 200 800
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VAT confines for State Revenue

3500000 3000000 2500000 million 2000000 1500000 1000000 500000 0 total revenue and grant tax revenue VAT revenue by percent 2006 1360409.8 1128140.6 241282.6 17.7 2007 1851189.8 1500720.3 266322.2 14.3 2008 2170523.4 1661543.3 368049.5 16.9 2009 1993995.5 1620549.6 325956.4 16.3 2010 3122464.2 2688236.3 579119.5 18.5

In 2006, the revenue from VAT was 241.3 billion MNT which made up 17.7 percent of Mongolia's state revenue for the year. In 2010, the revenue from VAT was 579,1 billion MNT which made up 18,5 percent of Mongolia's total state revenue for the year.
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Component of VAT (2010,2006)

2006

2010

33% 67% import domestic

31% 69% import domestic

In 2010, 67% of total revenues of VAT was charged at imported goods and 33% of which was charged at domestic goods, work or services.

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Income structure of VAT 2001-2010

422.8 domestic goods import goods 289.6

247.1
199 136.9 60.4 36.7 78 40.7 94.3 47.9 57.4 157.5 70.6 87.9 199 138.3 158.1 207.7

107.9

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

In 2010, the revenue from VAT was 579,1 billion MNT and 33 percent of which /207,7 billion MNT / was from VAT on domestic goods, work and services while 67 percent or 422,8 billion MNT was from VAT on imported goods. Almost 70 percent of total revenue of VAT is collected from VAT on imported goods.
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Refund of VAT
700 600 500 400 300 200 100 2001 2002 2003 2004 2005 2006 2007 2008 VAT 104.2 118.7 121.9 163.1 169.1 241.3 265.1 368 Repayment of VAT 9.7 11.9 20.4 31.3 47.1 46.2 41.8 59.8 Repayment percent 9% 10% 17% 19% 28% 19% 16% 16% 0 2009 2010 326 579.1 79.3 51.4 24% 9%

Refund of VAT has been increased in connection with increasing of manufactures, services and imports. In 2003, The value-added tax refund collected total 20.4 billion MNT and the value-added tax refund has increased to 51.4 billion MNT in 2010. In 2010, The value-added tax refund was total 51407.0 million MNT.
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Refund of VAT by percent (2010)

1% 3% 2% 16% 3%
mining and quarrying basting product commerce cashmere manufacture beer manufacture

77%
real estate activities

Mining and quarrying was 77 percent of total refund. Basting product was 16 percent of total refund.
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Empirical Study
Main factor of defining the character of tax system is the burden of tax. Tax burden to Mongolian total economics was comparatively permanent in 20012003. It fluctuated 25-31% in 2004-2009. VAT rate in GDP was comparatively permanent in 2005-2008. But for 2010 year, tax burden to economics was explosion as 10 functions with comparing with 2009 and its negative side is that tax base is decreased.

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Tax burden= Tax income /GDP VAT rate in GDP= Vat income /GDP

2001 Tax burden VAT rate in GDP 0.29 0.09

2002 0.29 0.1

2003 0.29 0.08

2004 0.31 0.09

2005 0.25 0.06

2006 0.3 0.06

2007 0.33 0.06

2008 0.31 0.06

2009 0.27 0.05

2010 0.37 0.08

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Empirical Study(cont.)
I take purpose to study that how much do influence GDP, tax income, VAT income, number of VAT payer and tax burden to VAT burden in interval of 2000-2010 and to find coherence between them in order to Multivariate Linear Regression (MLR) Analysis to the my research. Yi = b0+b1x1+b2x2+b3x3+b4x4+b5x5 Yi = VAT burden x1 = GDP rate x2 = total tax income x3 = VAT income x4 = number of VAT payer x5= Tax burden
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Result
Coefficient for Intercept GDP rate b0 0.0217 b1 -1.0041 total tax income b2 -6.0176 VAT income b3 2.6902 number of VAT payer b4 1.6214 Tax burden b5 0.2215

Summary output
Regression Statistics Multiple R square Adjusted R Square Standard Error Observations 0.999559 0.999118 0.998236 0.001220 11

ANOVA
df Regression Residual Total 5 5 10 SS 0.00843 7.44E-06 0.008433
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MS 0.00169 1.49E-06

F 1133.02081

Significance F 1.25E-07

Result
Coefficients Standard Error Intercept GDP Tax income VAT income Number of VAT payer Tax burden 0.0217 -1.00E-08 -6.02E-08 2.69E-07 1.62E-06 0.0073 5.22E-09 9.63E-09 4.12E-08 1.30E-06 tStat 2.9861 1.9239 6.2502 6.5340 1.2518 P-value 0.0306 Lower 95% 0.0030 Upper 95% 0.0405 3.38E-09 -3.54E-08 3.75E-07 4.95E-06 Lower 95.0% 0.0030 -2.35E-08 -8.49E-08 1.63E-07 -1.71E-06 Upper 95.0% 0.0405 3.38E-09 -3.54E-08 3.75E-07 4.95E-06 0.1124 -2.35E-08 0.0015 -8.49E-08 0.0013 1.63E-07 0.2660 -1.71E-06

0.2215

0.0378

5.8595

0.0021

0.1243

0.3187

0.1243

0.3187

If assessing linear equation Y=0.0217-1.0041*X1 -6.0176*X2+2.6902*X3+1.6214*X4+0.2215*X5

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1. When constant of regression equation, other factor influence or GDP,

tax income, VAT income and number of VAT payer havent influence; average VAT burden is 0.021 percent. 2. Multiple R/correlation coefficient/ is 0.99. it expresses that dependent variable and independent variable are correlation. If correlation coefficient is from 5 to 1, its mean is that they have strong correlation. 3. R square /coefficient of determination/ is 0.99 and this expresses how regression equation fit. 99 percent of VAT burden in average are explained by independent variable and lasting percent is explained by other factors which not included the model.

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4. Adjusted R Square /Adjusted Determination of coefficient/ is

less than R Square / coefficient of determination /. This is correct and it is looked that independent variables are very important at VAT burden. 5. Standard Error: from 100% to 0.001 value is expected there. 6. Significance F is less than 0.05 value and it expresses regression importance. Total dependent variables are 0.05 value and it expresses that they are important. When it was tested by 95% probability, dependent variable is 0.04 in maximum and 0.003 in minimum. If we sum above research, tax burden in GDP is 22.1% and VAT is 2.17%. Total tax burden is 9.8% and it is depended on VAT burden.
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Problems of Value Added Tax

Currently number of tax payer registration isnt enough. The company gets refund of total sale, not only auxiliary

activities sale. Increasing VAT refund burdens at state budget. Refund of company which carries operation in mining sector is increased owning to currently developing mining sector and it burdens at state budget. Threshold of VAT payers is too high. Control, inspection and test arent enough for VAT.

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Suggestions
Above research, tax burden in GDP is 22.1% and VAT is 2.17%. Total tax burden is 9.8% and it is depended on VAT burden. So recently Mongolian VAT system still has problems especially burden of VAT and refund of VAT. Tax policy influences importantly for developments of any sector. There is possible to reduce VAT burden if we implement these suggestions. 1. Companies avoid tax payments by did not reflect full sales amount. This is dangerous because it provides opportunity not only avoid from pay VAT but other taxes. There is need system that customer gets receipt, the seller issues the receipt in order to introduce cash dispenser. International Monetary Fund seems that there isnt any means to register sale income correctly other than cash dispenser.
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2. VAT is stable resource of permanent budget income and in order to increase it need to expand its basis. In our country VAT exemption and reduction is huge which has diminished possibility to expand such basis. Therefore in law need to invalidate following provisions: Provision 1.13 of Article 13 of VAT law sold gold. It misbalances tax equality and justice and provides discrimination of industry and therefore invalidates it. Provision 6.8 of Article 13 of VAT law renting service of apartment or its sections. 3. Most of our total export or almost 76.9 percent has belonged to mining industry and products. All of them are exported as raw materials without any processing and development and in this case VAT exemption is incorrect. In other words, our natural resource has become devalued. For the country like us which fully depends on mining industry can tax mining entities in different ways without imitating other countries such as not being issued VAT return, paid on sales or tax on exempt productions and service.
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4. Mongolia is higher level in the world for its territory area per person. Development of any countries are depended on its population number. In some counties, population growth is supported by tax policy but in our country, VAT is imposed from child to old aged person. Thus, children clothes should be released from VAT. 5. One important thing to influence for country development is education. However only sold newspaper is released from VAT. But books develop human intelligence and mental power more than newspaper. Thus, press and book should be imposed VAT as reduced rate. 6. By result of decreasing break-even rate, increasing number of tax payers, there is possible to reduce tax burden to units without reduction of state budget tax income in order to expand tax base.
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Conclusion
In Mongolia it is need to perform following activities to improve value added tax structure and its current legal environment, to reduce tax burden and other negative impacts, to make efficient taxation, expand basis, taxpayers based on studies and assessment: To improve operations of tax agencies and register eligible personnel and entities as VAT taxpayers, to expand tax basis which may reduce tax stress on each taxpayer. Currently, need to register all eligible entities which has annual sales at least 10 million tugrug In order to consider low income families, who affected heavy tax stress, to make different VAT taxes on goods and services of deferent social levels. Also in order to raise living level of families, to improve payment capacity need to implement prevention measures to increase salary of state employees, to raise lower level of salary etc. In order to expand tax basis need to increase eligible boundary of VAT tax payer registration and increase number of taxpayers. As a result may reduce tax stress on each unit without reducing stable budget source. In order to diminish tax load on poor families to use reduced taxes on childrens clothes, books and magazines, food products, commodity such as electricity and heating etc.
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 To make measures required to expand tax basis, to study methods and

possibilities for covering small business owners in this tax and conduct periodic measures Most of our total export or almost 80 percent has belong to mining industry and products. Implementing zero tolerance policy on tax for mining products can devalue our mineral resources. For the country like us which fully depends on mining industry can tax mining entities in different ways without imitating other countries such as not being issued VAT return, paid on sales or tax on exempt productions and service. If offer a VAT return per year to all citizens of Mongolia for their purchased goods, products and services then may expand taxpayers basis. As a result of using such mechanism can get significant benefits such as to improve VAT tax payment, and improve tax structure which main purpose of the VAT. According to study most of the developed countries use VAT exemption on their exports or implement zero tolerance policy. But their economic structure trended to export and all export products are final products or to tax goods and products which impossible to manufacture domestically.

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Thank you for your attention!

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