"VAT" redirects here. For the UK tax, see Value-added tax (United Kingdom). For other uses, see Vat (disambiguation).
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general consumption tax that is collected incrementally, based on the increase in value of a product or service at each stage of production or distribution. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. VATs raise about a fifth of total tax revenues both worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD).:14 As of 2018, 166 of the world's approximately 193 countries employ a VAT, including all OECD members except the United States,:14 which uses a sales tax system instead.
There are two main methods of calculating VAT: the credit-invoice or invoice-based method, and the subtraction or accounts-based method. Using the credit-invoice method, sales transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The credit-invoice method is the most widely employed method, used by all national VATs except for Japan. Using the subtraction method, at the end of a reporting period, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference. The subtraction method VAT is currently only used by Japan, although subtraction method VATs, often using the name "flat tax", have been part of many recent tax reform proposals by US politicians. With both methods, there are exceptions in the calculation method for certain goods and transactions, created for either pragmatic collection reasons or to counter tax fraud and evasion.
Germany and France were the first countries to implement VAT, doing so in the form of a general consumption tax during World War I. The modern variation of VAT was first implemented by France in the 1950s.Maurice Lauré, Joint Director of the France Tax Authority, the Direction Générale des Impôts implemented the VAT on 10 April 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.
A 2017 study found that the adoption of VAT is strongly linked to countries with corporatist institutions.
The amount of VAT is decided by the state as percentage of the end-market price. As its name suggests, value-added tax is designed to tax only the value added by a business on top of the services and goods it can purchase from the market.
To understand what this means, consider a production process (e.g., take-away coffee starting from coffee beans) where products get successively more valuable at each stage of the process. When an end-consumer makes a purchase, they are not only paying for the VAT for the product at hand (e.g., a cup of coffee), but in effect, the VAT for the entire production process (e.g., the purchase of the coffee beans, their transportation, processing, cultivation, etc.), since VAT is always included in the prices.
The value-added effect is achieved by prohibiting end-consumers from recovering VAT on purchases, but permitting businesses to do so. The VAT collected by the state is computed as the difference between the VAT of sales earnings and the VAT of those goods and services upon which the product depends. The difference is the tax due to the value added by the business. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction.
See also: Comparison of cash method and accrual method of accounting
The standard way to implement a value-added tax involves assuming a business owes some fraction on the price of the product minus all taxes previously paid on the good.
By the method of collection, VAT can be accounts-based or invoice-based. Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax) consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method.
By the timing of collection, VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds—no matter when the sale had been made. Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque date—regardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
In general, countries that have a VAT system require most businesses to be registered for VAT purposes. VAT registered businesses can be natural persons or legal entities, but countries may have different thresholds or regulations specifying at which turnover levels registration becomes compulsory. VAT-registered businesses are required to add VAT on goods and services that they supply to others (with some exceptions, which vary by country) and account for the VAT to the taxing authority, after deducting the VAT that they paid on the goods and services they acquired from other VAT-registered businesses.
Comparison with sales tax
Value-added tax avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchasers are not the end users, but the goods or services purchased are costs to their business, the tax they have paid for such purchases can be deducted from the tax they charge to their customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as of some autonomy.
In theory, sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main disadvantage of VAT is the extra accounting required by those in the middle of the supply chain; this is balanced by the simplicity of not requiring a set of rules to determine who is and is not considered an end user. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler.
A general economic idea is that if sales taxes are high enough, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism. However, because of its particular mechanism of collection, VAT becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states.
Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term "gross margin" is used rather than "profit". Profit is the remainder of what is left after paying other costs, such as rent and personnel costs.
Without any tax
- A widget manufacturer, for example, spends $1.00 on raw materials and uses them to make a widget.
- The widget is sold wholesale to a widget retailer for $1.20, leaving a gross margin of $0.20.
- The widget retailer then sells the widget to a widget consumer for $1.50, leaving a gross margin of $0.30.
With a sales tax
With a 10% sales tax:
- The manufacturer spends $1.00 for the raw materials, certifying it is not a final consumer.
- The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
- The retailer charges the consumer ($1.50 x 1.10) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30.
So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers have the administrative burden of supplying correct state exemption certifications, and checking that their customers (retailers) are not consumers. The retailer must verify and maintain these exemption certificate. In addition, the retailer must keep track of what is taxable and what is not along with the various tax rates in each of the cities, counties and states for the 35,000 plus various taxing jurisdictions.
A large exception to this state of affairs is online sales. Typically if the online retail firm has no nexus (also known as substantial physical presence) in the state where the merchandise will be delivered, no obligation is imposed upon the retailer to collect sales taxes from "out-of-state" purchasers. Generally, state law requires that the purchaser report such purchases to the state taxing authority and pay the use tax, which compensates for the sales tax that is not paid by the retailer.
With a value-added tax
With a 10% VAT:
- The manufacturer spends ($1 x 1.10) = $1.10 for the raw materials, and the seller of the raw materials pays the government $0.10.
- The manufacturer charges the retailer ($1.20 x 1.10) = $1.32 and pays the government ($0.12 minus $0.10) = $0.02, leaving the same gross margin of ($1.32 – $1.10 – $0.02) = $0.20.
- The retailer charges the consumer ($1.50 x 1.10) = $1.65 and pays the government ($0.15 minus $0.12) = $0.03, leaving the same gross margin of ($1.65 – $1.32 – $0.03) = $0.30.
- The manufacturer and retailer realize less gross margin from a percentage perspective. If the cost of raw material production were shown, this would also be true of the raw material supplier's gross margin on a percentage basis.
- Note that the taxes paid by both the manufacturer and the retailer to the government are 10% of the values added by their respective business practices (e.g. the value added by the manufacturer is $1.20 minus $1.00, thus the tax payable by the manufacturer is ($1.20 – $1.00) × 10% = $0.02).
With VAT, the consumer has paid, and the government received, the same dollar amount as with a sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.
On the other hand, they incur increased accounting costs for collecting the tax, which are not reimbursed by the taxing authority. For example, wholesale companies now have to hire staff and accountants to handle the VAT paperwork, which would not be required if they were collecting sales tax instead.
The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.
Limitations to the examples
In the above examples, we assumed that the same number of widgets were made and sold both before and after the introduction of the tax. This is not true in real life.
The supply and demandeconomic model suggests that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand curve shifts leftward, or the supply curve shifts upward. The two are functionally equivalent. Consequently, the quantity of a good purchased decreases, and/or the price for which it is sold increases.
This shift in supply and demand is not incorporated into the above example, for simplicity and because these effects are different for every type of good. The above example assumes the tax is non-distortionary.
Limitations of VAT
A VAT, like most taxes, distorts what would have happened without it. Because the price for someone rises, the quantity of goods traded decreases. Correspondingly, some people are worse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. If the income lost by the economy is greater than the government's income; the tax is inefficient. It must be noted that a VAT and a Non-VAT have the same implications on the microeconomic model.
The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities – in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like VAT are often considered superior because they distort incentives to invest, save and work less than most other types of taxation – in other words, a VAT discourages consumption rather than production.
In the diagram on the right:
- Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve
- Governments tax income: the grey rectangle that says "tax revenue"
- Total consumer surplus after the shift: the green area
- Total producer surplus after the shift: the yellow area
Imports and exports
Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. There is a significant difference between VAT and Sales Tax for goods that are imported and exported:
- VAT is charged for a commodity that is exported while sales tax is not.
- Sales tax is paid for the full price of the imported commodity, while VAT is expected to be charged only for value added to this commodity by the importer and the reseller.
This means that, without special measures, goods will be taxed twice if they are exported from one country that does have VAT to another country that has sales tax instead. Conversely, goods that are imported from a VAT-free country into another country with VAT will result in no sales tax and only a fraction of the usual VAT. There are also significant differences in taxation for goods that are being imported / exported between countries with different systems or rates of VAT. Sales tax does not have those problems – it is charged in the same way for both imported and domestic goods, and it is never charged twice.
To fix this problem, nearly all countries that use VAT use special rules for imported and exported goods:
- All imported goods are charged VAT tax for their full price when they are sold for the first time.
- All exported goods are exempted from any VAT payments.
For these reasons VAT on imports and VAT rebates on exports form a common practice approved by the World Trade Organization (WTO).
Consider a Ford car that cost $25,000 to produce in the USA (that does not have a VAT, but does have 10% Sales Tax) and an Opel car that costs $25,000 to produce in Germany (that does have 20% VAT). Both prices are shown with all taxes imposed on manufacturers of these cars, including social taxes, income taxes, etc., but without taxes imposed on consumers – that is, sales tax in USA and VAT in Germany.
Without a special modification related to Export / Import, customer prices will be
|Cost to Produce||Price paid for Ford |
|Price paid for Opel |
|Taxes paid for Ford |
|Taxes paid for Opel |
|In the USA||$25,000||$27,500||$33,000||$2,500 (10% sales tax only)||$8,000 (Original 20% VAT already on import & later 10% sales tax at retail)|
|In Germany||$25,000||$25,000||$30,000||$0 (No sales tax in Germany)||$5,000 (VAT)|
Note that Opel prices appear to be inherently higher than Ford ones. A common mistake in a lot of examples trying to prove that VAT rebates form as a trade barrier is, to set retail prices equal for both Ford and Opel. This way, prices are initially equal, but become different after all the additional VAT taxes and rebates described below. Such an approach does not take into account the simple fact that Opel prices in the table above always include VAT while Ford prices never include it. That's exactly why additional adjustments are made in VAT taxation.
One may try to object that this simply means that Germany has generally higher taxes but, in fact, this is not the case for consumer taxes. Consider a hypothetical situation where consumer tax remains exactly the same in Germany as in the example above, but now it is collected as 20% Sales Tax:
|Price paid for Ford|
|Price paid for Opel|
|Taxes paid for Ford|
|Taxes paid for Opel|
|In the USA||$27,500||$27,500||$2,500 (sales tax only)||$2,500 (sales tax only)|
|In Germany||$30,000||$30,000||$5,000 (sales tax only)||$5,000 (sales tax only)|
Now lets use the same assumption that the end price to the consumer remains $25,000 and there are no taxes. All goods would be sold for $25,000 and no manufacturer has an advantage:
|Price paid for Ford|
|Price paid for Opel|
|Taxes paid for Ford|
|Taxes paid for Opel|
|In the USA||$25,000||$25,000||$0 (No tax)||$0 (No tax)|
|In Germany||$25,000||$25,000||$0 (No Tax)||$0 (No Tax)|
Indeed, the end price to the consumer is $25,000 in all instances.
Once again, assuming that the end price to the consumer is $25,000, consider a hypothetical situation where consumer tax remains 10% in the United States, Germany imposes a 20% VAT on imported US goods, rebates its 20% VAT on goods exported to the US, and the US charges a 10% sales tax on both goods:
|Price paid for Ford|
|Price paid for Opel|
|Taxes paid for Ford|
|Taxes paid for Opel|
|In the USA||$27,500||$27,500||$2,500 (sales tax only)||$2,500 (sales tax only)|
|In Germany||$30,000||$30,000||$5,000 (VAT tax only)||$5,000 (end price to consumer)|
Even in the case in which a country with a VAT remits exports, price distortions do not occur. A U.S. producer exporting a car to Germany will not be charged the U.S. sales tax, but will be charged the VAT. Since a German domestic producer will also be charged a VAT, both companies are on equal footing in Germany. Similarly, a U.S. company selling a car domestically will be charged a sales tax as will the German manufacturer attempting to sell in the U.S. However, if Germany did not remit the VAT on export, the German producer would be charged both the sales tax and the VAT tax, thus facing a price distortion. The usage of VAT remittance on exports helps ensure that export price distortion does not occur.
Around the world
Main article: Goods and Services Tax (Australia)
The goods and services tax (GST) is a value-added tax introduced in Australia in 2000, which is collected by the Australian Tax Office. The revenue is then redistributed to the states and territories via the Commonwealth Grants Commission process. In essence, this is Australia's program of horizontal fiscal equalisation. Whilst the rate is currently set at 10%, there are many domestically consumed items that are effectively zero-rated (GST-free) such as fresh food, education, and health services, certain medical products, as well as exemptions for Government charges and fees that are themselves in the nature of taxes.
Main article: Value added taxation in Bangladesh
Value-added tax in Bangladesh was introduced in 1991 replacing Sales Tax and most of Excise Duties. The Value Added Tax Act, 1991 was enacted that year and VAT started its passage from 10 July 1991. The 10 July is observed as National VAT Day in Bangladesh.
Within the passage of 25 years, VAT has become the largest source of Government Revenue. About 56% of total tax revenue is VAT revenue in Bangladesh.
Standard VAT rate is 15%. Export is Zero rated. Besides these rates, there are several reduced rates locally called Truncated Rate for service sectors that are available. Different rates for different services are applied. Truncated Rates are 1.5%, 2.25%, 2.5%, 3%, 4%, 4.5%, 5%, 5.5%, 6%, 7.5%, 9% and 10%.
Bangladesh VAT is characterized by many distortions, i.e., value declaration for products and services, branch registrations, tariff values, truncated rates, many restrictions on credit system, lump-sum VAT (package VAT) advance payment of VAT, excessive exemptions etc. For many distortions, VAT-GDP ratio is about 4% here. To increase the productivity of VAT, Government enacted the Value Added Tax and Supplementary Duty Act of 2012. This law was initially scheduled to operate with an automated administration from 1 July 2017, however the project has now been extended for another two years.
National Board of Revenue 1 is the apex organization administering the Value Added Tax.
Main articles: Goods and Services Tax (Canada) and Harmonized Sales Tax
Goods and Services Tax (GST) is a value-added tax introduced by the Federal Government in 1991 at a rate of 7%, later reduced to the current rate of 5%. A Harmonized Sales Tax (HST; combined GST and provincial sales tax) is collected in New Brunswick (15%), Newfoundland (15%), Nova Scotia (15%), Ontario (13%), Prince Edward Island (15%), and, for a short time until 2013, British Columbia (12%). (Quebec has a de facto 14.975% HST: its provincial sales tax follows the same rules as the GST, and both are collected together by Revenu Québec.) Advertised and posted prices generally exclude taxes, which are calculated at time of payment; common exceptions are motor fuels, the posted prices for which include sales and excise taxes, and items in vending machines as well as alcohol in monopoly stores. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt.
VAT was implemented in China in 1984 and is administered by the State Administration of Taxation. In 2007, the revenue from VAT was 15.47 billion yuan ($2.2 billion) which made up 33.9 percent of China's total tax revenue for the year. The standard rate of VAT in China is 17%. There is a reduced rate of 13% that applies to products such as books and types of oils.
Main article: European Union value added tax
The European Union value added tax (EU VAT) covers consumption of goods and services and is mandatory for member states of the European Union. The EU VAT's key issue asks where the supply and consumption occurs thereby determining which member state will collect the VAT and which VAT rate will be charged.
Each member state's national VAT legislation must comply with the provisions of EU VAT law,  which requires a minimum standard rate of 15% and one or two reduced rates not to be below 5%. Some EU members have a 0% VAT rate on certain supplies; these states would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). Certain goods and services must be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). The highest rate currently in operation in the EU is 27% (Hungary), though member states are free to set higher rates. There is, in fact only one EU country (Denmark) that does not have a reduced rate of VAT.
There are some areas of member states (both overseas and on the European continent) which are outside the EU VAT area, and some non-EU states that are inside the EU VAT area. External areas may have no VAT or may have a rate lower than 15%. Goods and services supplied from external areas to internal areas are considered imported. (See EU VAT area § EU VAT area for a full listing.)
VAT that is charged by a business and paid by its customers is known as "output VAT" (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government. Private people are generally allowed to buy goods in any member country and bring it home and pay only the VAT to the seller. Input VAT that is attributable to VAT-exempt supplies[example needed] is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the "sticking" VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage).
Gulf Cooperation Council
Main article: Cooperation Council for the Arab States of the Gulf
Increased growth and pressure on the GCC's governments to provide infrastructure to support growing urban centers, the Member States of the Gulf Co-operation Council (GCC), which together make up the Gulf Co-operation Council (GCC), have felt the need to introduce a tax system in the region.
In particular, the United Arab Emirates (UAE) on 1 January 2018 implemented VAT. For companies whose annual revenues exceed $102,000 (Dhs 375,000), registration is mandatory. Oman’s Minister of Financial Affairs indicated that GCC countries have agreed the introductory rate of VAT is 5%. The Kingdom of Saudi Arabia VAT system was implemented in 01 January 2018 at 5% rate.
Further information: Value added taxation in India
VAT was introduced into the Indian taxation system from 1 April 2005. Of the then 28 Indian states, eight did not introduce VAT at first instance. There is uniform VAT rate of 5% and 14.5% all over India. The government of Tamil Nadu introduced an act by the name Tamil Nadu Value Added Tax Act 2006 which came into effect from the 1 January 2007. It was also known as the TN-VAT. Under the BJP government, a new national Goods and Services Tax was introduced under the One Hundred and First Amendment of the Constitution of India.
Further information: Taxation in Indonesia
Value Added Tax (VAT) was introduced into the Indonesian taxation system from 1 April 1985. General VAT rate is ten percent. Using indirect subtraction method with invoice to calculate value added tax payable. VAT was Collected by the Directorate General of Taxation, Ministry of Finance. Some goods and services are exempt from VAT like basic commodities vital to the general public, medical or health services, religion services, educational services and Services provided by the government in respect of carrying out general governmental administration.
Main article: Goods and Services Tax (Malaysia)
The goods and services tax (GST) is a value-added tax introduced in Malaysia in 2015, which is collected by the Royal Malaysian Customs Department. The standard rate is currently set at 6%. Many domestically consumed items such as fresh foods, water and electricity are zero-rated, while some supplies such as education and health services are GST exempted.
Value-added tax (Spanish: Impuesto al Valor Agregado, IVA) is a tax applied in Mexico and other countries of Latin America. In Chile, it is also called Impuesto al Valor Agregado and, in Peru, it is called Impuesto General a las Ventas or IGV.
Prior to the IVA, a sales tax (Spanish: impuesto a las ventas) had been applied in Mexico. In September 1966, the first attempt to apply the IVA took place when revenue experts declared that the IVA should be a modern equivalent of the sales tax as it occurred in France. At the convention of the Inter-American Center of Revenue Administrators in April and May 1967, the Mexican representation declared that the application of a value-added tax would not be possible in Mexico at the time. In November 1967, other experts declared that although this is one of the most equitable indirect taxes, its application in Mexico could not take place.
In response to these statements, direct sampling of members in the private sector took place as well as field trips to European countries where this tax was applied or soon to be applied. In 1969, the first attempt to substitute the mercantile-revenue tax for the value-added tax took place. On 29 December 1978 the Federal government published the official application of the tax beginning on 1 January 1980 in the Official Journal of the Federation.
As of 2010, the general VAT rate was 16%. This rate was applied all over Mexico except for bordering regions (i.e. the United States border, or Belize and Guatemala), where the rate was 11%. The main exemptions are for books, food, and medicines on a 0% basis. Also some services are exempt like a doctor's medical attention. In 2014 Mexico Tax Reforms eliminated the favorable tax rate for border regions and increased the VAT to 16% across the country.
Further information: Value added tax (Nepal)
VAT was implemented in 1998 and is the major source of government revenue. It is administered by Inland Revenue Department of Nepal. Nepal has been levying two rates of VAT: Normal 13% and zero rate. In addition, some goods and services are exempt from VAT.
Main article: Goods and Services Tax (New Zealand)
The goods and services tax (GST) is a value-added tax that was introduced in New Zealand in 1986, currently levied at 15%. It is notable for exempting few items from the tax. From July 1989 to September 2010, GST was levied at 12.5%, and prior to that at 10%.
The Nordic countries
MOMS (Danish: merværdiafgift, formerly meromsætningsafgift), Norwegian: merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (abbreviated MVA), Swedish: Mervärdes och OMSättningsskatt (until the early 1970s labeled as OMS OMSättningsskatt only), Icelandic: virðisaukaskattur (abbreviated VSK), Faroese: meirvirðisgjald (abbreviated MVG) or Finnish: arvonlisävero (abbreviated ALV) are the Nordic terms for VAT. Like other countries' sales and VAT taxes, it is an indirect tax.
|Year||Tax level (Denmark)||Name|
In Denmark, VAT is generally applied at one rate, and with few exceptions is not split into two or more rates as in other countries (e.g. Germany), where reduced rates apply to essential goods such as foodstuffs. The current standard rate of VAT in Denmark is 25%. That makes Denmark one of the countries with the highest value-added tax, alongside Norway, Sweden and Croatia. A number of services have reduced VAT, for instance public transportation of private persons, health care services, publishing newspapers, rent of premises (the lessor can, though, voluntarily register as VAT payer, except for residential premises), and travel agency operations.
In Finland, the standard rate of VAT is 24% as of 1 January 2013 (raised from previous 23%), along with all other VAT rates, excluding the zero rate. In addition, two reduced rates are in use: 14% (up from previous 13% starting 1 January 2013), which is applied on food and animal feed, and 10%, (increased from 9% 1 January 2013) which is applied on passenger transportation services, cinema performances, physical exercise services, books, pharmaceuticals, entrance fees to commercial cultural and entertainment events and facilities. Supplies of some goods and services are exempt under the conditions defined in the Finnish VAT Act: hospital and medical care; social welfare services; educational, financial and insurance services; lotteries and money games; transactions concerning bank notes and coins used as legal tender; real property including building land; certain transactions carried out by blind persons and interpretation services for deaf persons. The seller of these tax-exempt services or goods is not subject to VAT and does not pay tax on sales. Such sellers therefore may not deduct VAT included in the purchase prices of his inputs. Åland, an autonomous area, is considered to be outside the EU VAT area, even if its VAT rate is the same as for Finland. Goods brought from Åland to Finland or other EU countries is considered to be export/import. This enables tax free sales onboard passenger ships.
In Iceland, VAT is split into two levels: 24% for most goods and services but 11% for certain goods and services. The 11% level is applied for hotel and guesthouse stays, licence fees for radio stations (namely RÚV), newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption (but not alcoholic beverages), access to toll roads and music.
In Norway, VAT is split into three levels: 25% general rate, 15% on foodstuffs and 10% on the supply of passenger transport services and the procurement of such services, on the letting of hotel rooms and holiday homes, and on transport services regarding the ferrying of vehicles as part of the domestic road network. The same rate applies to cinema tickets and to the television licence. Financial services, health services, social services and educational services are all outside the scope of the VAT Act. Newspapers, books and periodicals are zero-rated.Svalbard has no VAT because of a clause in the Svalbard Treaty.
In Sweden, VAT is split into three levels: 25% for most goods and services, 12% for foods including restaurants bills and hotel stays and 6% for printed matter, cultural services, and transport of private persons. Some services are not taxable for example education of children and adults if public utility, and health and dental care, but education is taxable at 25% in case of courses for adults at a private school. Dance events (for the guests) have 25%, concerts and stage shows have 6%, and some types of cultural events have 0%.
MOMS replaced OMS (Danish "omsætningsafgift", Swedish "omsättningsskatt") in 1967, which was a tax applied exclusively for retailers.
Value-added tax (VAT) in South Africa was set at a rate of 14% and remained unchanged since 1993. Finance Minister Malusi Gigaba announced on 21 February 2018 that the VAT rate will be increased by one percentage point to 15%. Some basic food stuffs, as well as paraffin, will remain zero rated. The new rate is to be effective from 1 April 2018.
Switzerland and Liechtenstein
- Further information: Taxation in Switzerland § Value added tax
Switzerland has a customs union with Liechtenstein that also includes the German exclave of Büsingen am Hochrhein and the Italian exclave of Campione d'Italia. The Switzerland–Liechtenstein VAT area has a general rate of 7.7%.
Trinidad and Tobago
Value-added tax (VAT) in T&T is currently 12.5% as of February 1, 2016. Before that date VAT used to be at 15%.
In Ukraine, the revenue to state budget from VAT is the most significant. By Ukraine tax code, there are 3 VAT tax rates in Ukraine: 20% (general tax rate; applied to most goods and services), 7% (special tax rate; applied mostly to medicines and medical products import and trade operations) and 0% (special tax rate; applied mostly to export of goods and services, international transport of passengers, baggage and cargo).
Further information: Sales taxes in the United States
In the United States, currently, there is no federal value-added tax (VAT) on goods or services. Instead, a sales and use tax is used in most US states. VATs have been the subject of much scholarship in the US and are one of the most contentious tax policy topics.
In 2015, Puerto Rico passed legislation to replace its 6% sales and use tax with a 10.5% VAT beginning 1 April 2016, although the 1% municipal sales and use tax will remain and, notably, materials imported for manufacturing will be exempted. In doing so, Puerto Rico will become the first US jurisdiction to adopt a value-added tax. However, two states have previously enacted a form of VAT as a form of business tax in lieu of a business income tax, rather than a replacement for a sales and use tax.
The state of Michigan used a form of VAT known as the "Single Business Tax" (SBT) as its form of general business taxation. It is the only state in the United States to have used a VAT. When it was adopted in 1975, it replaced seven business taxes, including a corporate income tax. On 9 August 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which was replaced by the Michigan Business Tax on 1 January 2008.
The state of Hawaii has a 4% General Excise Tax (GET) that is charged on the gross income of any business entity generating income within the State of Hawaii. The State allows businesses to optionally pass on their tax burden by charging their customers a quasi sales tax rate of 4.166%. The total tax burden on each item sold is more than the 4.166% charged at the register since GET was charged earlier up the sales chain (such as manufacturers and wholesalers), making the GET less transparent than a retail sales tax.
Discussions about a national US VAT
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Soon after President Richard Nixon took office in 1969, it was widely reported that his administration was considering a federal VAT with the revenue to be shared with state and local governments to reduce their reliance on property taxes and to fund education spending. A national subtraction-method VAT, often referred to as a "flat tax", has been part of proposals by many politicians as a replacement of the corporate income tax.
A border-adjustment tax (BAT) was proposed by the Republican Party in their 2016 policy paper "A Better Way — Our Vision for a Confident America", which promoted a move to a "destination-based cash flow tax
A value-added tax (VAT) is a consumption tax levied on products at every point of sale where value has been added, starting from raw materials and going all the way to final retail purchase. Ultimately, the consumer pays the VAT; buyers at earlier stages of production receive reimbursements for the previous VAT they've paid.
VAT is commonly expressed as a percentage of total cost. For example, if a product costs $100 and there is a 15% VAT, the consumer pays $115 to the merchant. The merchant keeps $100 and remits $15 to the government.
A VAT system is often confused with a national sales tax. With a sales tax, the tax is only collected once – at the final point of purchase by a consumer – and so only the retail customer ever pays it. The VAT system is invoice-based and collected at several points throughout an item's production, each time value is added and a sale is made. Every seller in the production chain charges a VAT tax to the buyer, which it then remits to the government. The amount of tax levied at each sale along the chain is based on the value added by the latest seller.
Example of Value-Added Taxation
To calculate the amount of VAT a consumer or business must pay, take the cost of the goods or service, and subtract any material costs previously taxed. An example of a 10% VAT in sequence through a chain of production can occur as follows:
A manufacturer of electronic components purchases raw materials made out of various metals from a dealer. The metals dealer – the seller at this point in the production chain – charges the manufacturer $1 plus a 10-cent VAT, and then pays the 10% VAT to the government.
The manufacturer adds value through its manufacturing process of creating the electronic components, which it then sells to a cell phone manufacturing company for $2 plus a 20-cent VAT. The manufacturer remits 10 cents of the 20-cent VAT it collected to the government, the other 10 cents reimbursing it for the VAT it previously paid to the metals dealer.
The cell phone manufacturer adds value by making its mobiles, which it then sells to a cellphone retailer for $3 plus a 30-cent VAT. It pays 10 cents of this VAT is paid to the government; the other 20 cents reimburse the cell phone manufacturer for the previous VAT it has paid to electronic component company.
Finally, the retailer sells a phone to a consumer for $5 plus a 50-cent VAT, 20 cents of which is paid to the government.
The VAT paid at each sale point along the way represents 10% of the value added by the seller.
Value Added Tax Arguments
In Favor of VAT
Those who favor value-added taxation make the argument that a VAT system encourages payment of taxes and discourages attempts to avoid them. The fact that VAT is charged at each stage of production rewards tax compliance and and acts as a disincentive from operating in the black market: For manufacturers and suppliers to be credited for paying VAT on their inputs, they are responsible for collecting VAT on their outgo – the goods they create or sell. Retail businesses have incentives to collect the tax from consumers, since that is the only way for them to obtain credit for the VAT they have paid in buying their goods wholesale. A VAT is also supported as a better alternative to so-called hidden taxes.
Because it is typically levied at the same percentage on different products and services, a VAT tends to have less of an impact on economic decisions than an income tax. Still, it can register on a country's economy. Along with improving the efficiency of tax collection, a VAT is considered an effective way to improve growth of a nation's gross domestic product (GDP), raise tax revenue and eliminate government budget deficits.
Opponents of VAT claim that it unfairly burdens people with lower incomes. Unlike a progressive tax (like the U.S. income tax system, in which higher-income individuals pay a higher percentage of tax), a VAT is like a flat tax where all consumers of all income levels pay the same percentage, regardless of earnings: Whether your annual income is $50,000 or $500,000, you are levied the identical 15% VAT on products and services. Obviously, that 15% cuts deeper into the budget of the $10,000 individual than the $500,000 person. If the former paid $1,000 in VAT taxes, that comes out to 2% of his annual income. If the latter pays the same $1,000 in VAT, it's only .02% of his income.
To combat this income inequality argument, most countries that have VAT (including Canada and the United Kingdom) offer numerous exemptions, usually on necessities such as children’s clothing, child care and groceries.
The United States holds the distinction of being the only member of the Organization for Economic Co-operation and Development (OECD) without a VAT.