11 April, 2020

How can governments legally and easily inject liquidity into the services sector? By means of tax credits on the basis of the GST/ VAT framework

In my contribution of 22 March (https://www.christianlaesser.net/2020/03/cash-is-king-its-time-for-helicopter.html) I argued that loans are problematic for companies in the service sector and that alternative solutions to overcome liquidity crunches should be considered. However, the aim of any measure should be that it has a general fiscal stimulating effect but at the same time does not distort competition and requires as little discretion as possible in the specific individual application. One possibility for such a measure is to refund value added taxes/ goods and sales taxes by means of temporary tax credits.

Basic idea

The idea behind this is relatively simple: companies continue to pay their VAT/GST (net; i.e. with normal consideration of input tax deductions) according to/ complying with an existing legal basis (laws and ordinances). However, they will now receive limited-in-time a tax credit, based on an additional legal basis. This legal basis can be a law and/or ordinance; the latter normally could be introduced quicker. The amount of this credit is calculated gross (with the applicable VAT/ GST rate on their turnover or parts hereof.
Here is a simpler description of this scheme from a process perspective
  1. Each company pays the VAT/ GST as before (i.e. with deduction of input tax).There is no change in content or process.
  2. In addition, and new: Each company reports its turnover in a separate process (this turnover must of course be identical to that used for VAT/ GST invoicing). A tax credit calculated on the basis of the applicable VAT/ GST rate is then issued on all or parts of this turnover.


This tax credit can be either freely usable or earmarked for a specific purpose. If it is designed for a specific purpose, it is advisable to reduce the special loans provided in SARS-CoV-2 support programs or generally to reduce debt.
The context or country-specific design of such a tax credit can be based on various parameters, depending on the situation:

Tax base: amount of turnover to determine the tax credit base (gross; without consideration of input tax) for which a tax credit is refunded: this can range from 100% to 0% of turnover.

·        General orientation: the scheme can be set-up in a retrospective (tax credit for past turnovers) vs. prospective (tax credit for present and future turnovers) way, or a combination hereof.

·        Duration of the arrangement: the duration of the scheme can range from a minimum of 1 year to (theoretically) indefinite.

·        Conditions for tax credit eligibility: based on the territorial principle, only entities paying taxes in the first place should be included in this scheme. This condition fulfilled, either all, irrespective of the level of indebtedness (structurally neutral) or only to those who have taken out SARS-CoV-2 related loans/debt capital and as long as these debts have not been repaid can be eligible to benefit from such a scheme . With the debts decreasing over time, there would be a quasi-automatic time limit.

·        Potential recoverability: The tax credit is either final or can - depending on certain and very optimal conditions at least be partially recovered. Example: via future and time-limited increased profit taxes. 


There are rationales for such a scheme beyond the once I addressed in the before-mentioned blog. 
There are positive effects at the company as well as aggregate (overall economic) level: Companies with a low net tax due to a high volume of inputs benefit more than companies with a high net tax due to a low volume of inputs. This provides an incentive to closely evaluate processes and consider outsourcing where feasible and productivity can be increased. As a result of that, and on an aggregate level, companies that are closely linked operationally with suppliers and/or make regular investments and procure many inputs (and thus generate input tax deductions) are more likely to benefit from this scheme than companies that operate in "isolation". Such an instrument thus also prevents the undesirable preservation of economic structures.

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