Canadian Entrepreneurs Complain VAT Spells Trouble --- Their Experience Suggests the Tax Can Be a Big Headache for Small Firms
TORONTO -- The Clinton administration has decided against a value-added tax for now as a way to pay for health-care reforms in the U.S. But the VAT, a kind of national sales tax, undoubtedly will come up again because it has raised considerable revenue in other countries.</br></br>American small-business groups, fearful of heavy record-keeping burdens, welcome the reprieve. Canada's two-year experience with a VAT shows how big a headache the tax can be for entrepreneurs -- especially very small ones.</br></br>A VAT is a sales tax collected by businesses on every stage of production and distribution: wholesaling, manufacturing, retailing, the works. The tax may include services, such as legal fees. The Canadian version, called the Goods and Services Tax, took effect in January 1991. It replaced a hefty manufacturers' sales tax on many goods.</br></br>The recession has prevented the GST from bringing in as much revenue as the old tax. But the tax has helped to boost exports. Mark Drake, president of the Canadian Exporters Association, says many members, representing businesses of all sizes, report that "it was beneficial to their bottom lines."</br></br>It's a different story for a number of small firms, however. The Canadian Federation of Independent Business says the VAT is such an administrative nightmare that it costs the economy about 20 cents to collect each dollar that goes to the government. About 88% of that burden falls on businesses with 20 or fewer employees, the small-business group estimates.