How does VAT affect the behavior of small companies?

How does VAT affect the behavior of small companies

How does VAT affect the behavior of small companies: VAT (Value Added Tax) is used as primary indirect tax by the countries all over the world. The countries have thresholds depending on turnover, below which business do not need to register for VAT. The countries that implemented VAT recently have high threshold.

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The growth and development of small business affected by threshold

The small companies or businesses respond to VAT threshold due to the increased taxation and increased cost of compliance. The businesses below the turnover threshold also need to register for VAT, thus is not mandatory to do so. This is happens when a firm has large purchases of intermediate inputs, and/or they can pass most of the VAT on output onto the purchaser.

The companies keep the turnover below the threshold by reducing sale or by misreporting the sales. This is how bunching occurs. The companies respond to the threshold by making possible irregular changes in production factors.

Bunching will affect the growth of small companies. VAT threshold acts as a hindrance for the growth because the companies will try to keep the income below the threshold for a long period of time to avoid VAT.

The above report shows that the VAT affect the behavior of small companies in a significant way.