IMPACT OF VAT ON GROWTH AND PROFITABILITY OF THE FAST GROWING COMPANIES

Abstract

The subject of this article is to show that value added tax (VAT) has significant downside impact on growth and profitability. In particular, the VAT affects young, fast growing companies that are in high demand for cash to fuel their growth and expansion. In this study, we are going to show that VAT is responsible for 1) increase of the cost of doing business, 2) less income as a result of the opportunity loss and 3) increase in the risk of doing business. Increase in cost comes from the need to borrow money to pay the outstanding VAT. The fast growing companies experience significant growth of their VAT gap resulting in a need to borrow money to pay for it. Also, the cost of administrating VAT is factored back in the VAT causing higher value of the final VAT with cascading effect on the operating cost. Opportunity loss comes from the fact that companies have to direct the funds towards VAT instead to invest into the growth and profitability. Increase in risk comes from the additional financial burden from borrowing money and using that money to pay the VAT gap. The action lowers the total amount of funds that company is eligible to borrow based on its financial position. Therefore, a company’s capability to meat is financial obligations is reduced since there is less money for covering operating expenses and growth in assets not to say servicing its payables.