Implementing subnational value added taxes on internal trade: The compensating VAT (CVAT)

This paper describes an ingenious and elegant scheme for implementing a destination-based value added tax (VAT) on cross-border trade within a nation or group of nations. Sales to local purchasers (registered traders, households, and unregistered traders) would be subject to the local VAT, but sales to purchasers in other states would be zero-rated for state VAT and subject instead to a "compensating value added tax'' (CVAT). Credit would be allowed for tax on purchases by registered traders: for the local VAT on intrastate purchases and for the CVAT on interstate purchases.