Value added tax
Encyclopedia
A value added tax or value-added tax (VAT) is a form of consumption tax
. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The "value added
" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax
in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
Maurice Lauré
, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 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.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax—persuade the seller that he (the buyer) is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, but the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer.
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 a loss 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 difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. 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.
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 what follows, the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel.
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 only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.
This is, of course, all theory. In practice a retailer specializes in sales to consumers. Retailers tend to sell a large variety of products and have enough on hand for their trade until the next supply shipment comes in, but not enough on hand, for example, to sell 100,000 widgets to one customer. In another example, for clarification, a consumer cannot wander into a grocery store and make a point-of-sale purchase for 10,000 rolls of toilet paper. On the other hand, there is nothing to prevent a nonconsumer from avoiding tax at "retail" establishments that cater to both consumers and non-end-users. However the burden is on the non-end-users to provide the business license, exemption certificate, etc., necessary for exemption from sales taxes ordinarily collected by the retail establishment.
A large exception to this state of affairs which is growing exponentially is online sales. Typically if the online retail firm has no "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 sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation.
With VAT, the consumer has paid, and the government received, the same as with 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. If you calculate the added overhead required to collect VAT, businesses collecting VAT have less profits overall than businesses collecting sales tax.
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.
There are no problems with online sales from businesses located within the country under a national VAT system . All buyers pay VAT and if the buyer is a company, they deduct the VAT. A company can buy consumer items they need in small quantities, like coffee and toilet paper, in a shop without certifying they are not a consumer.
The fundamentals of supply and demand
suggest 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.
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
. The income lost by the economy is greater than the government's income; the tax is inefficient. 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 above diagram,
, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value added tax is in fact a proportional tax
in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor.
Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.
Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the VAT on these inputs (unless of course the carpenter also has at least some jobs done with receipt, and claims all purchased inputs to go to those jobs). While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems.
Because exports are generally zero-rated
(and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips
or mobile phones) are transported from one member state to another. During these transactions, some companies owe VAT, others acquire a right to reclaim VAT. The first companies, called 'missing traders' go bankrupt without paying. The second group of companies can 'pump' money straight out of the national treasuries.
This kind of fraud originated in the 1970s in the Benelux
-countries. Today, the British treasury
is a large victim. There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden
, the major owner of a limited company is personally responsible for taxes. This is circumvented by having an unemployed person without assets as the formal owner.
Under a sales tax system, only businesses selling to the end-user are required to collect tax, and bear the accounting cost of collecting the tax. Under VAT, however, manufacturers and wholesale companies also have to hire accountants and incur accounting expenses to handle the additional paperwork required for collecting VAT, increasing overhead costs that in turn get incorporated into the cost of the item, possibly creating a cascading effect of higher prices throughout the chain of production. Manufacturers and wholesalers have a choice of retaining less profits overall, or passing on the additional cost to their customers in the form of increased prices.
(EU VAT) is a value added tax encompassing member states in the European Union VAT area. Joining in this is compulsory for member states
of the European Union
. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. 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 as set out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does allow Member States some degree of flexibility in implementation of VAT legislation. For example different rates of VAT are allowed in different EU member states. However Directive 2006/112 requires Member states to have a minimum standard rate of VAT of 15% and one or two reduced rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies- these Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). The current maximum rate in operation in the EU is 25%, though member states are free to set higher rates.
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.
The VAT Directive (prior to 1 January 2007 referred to as the Sixth VAT Directive) requires certain goods and services to 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). Input VAT that is attributable to exempt supplies 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).
) or meirverdiavgift (nynorsk
) (abbreviated MVA), (earlier mervärdesomsättningsskatt), (abbreviated VSK), (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
.
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
and Sweden. 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 23% as of 1 July 2010 (raised from previous 22%), along with all other VAT rates, excluding the zero rate. In addition, two reduced rates are in use: 13% (reduced in October 2009 from 17% to 12% for non-restaurant food, increased to 13% from July 2010, also encompasses restaurant food from July 2010), which is applied on food and animal feed, and 9%, (increased from 8% July 2010) 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.
In Iceland
, VAT is split into two levels: 25.5% for most goods and services but 7% for certain goods and services.
The 7% 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 road
s and music.
In Norway
, VAT is split into three levels: 25% general rate, 14% on foodstuffs and 8% on 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 license. 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 including restaurants bills, 12% for foods (incl. bring home from restaurants) and hotel stays (but breakfast at 25%) 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.
Of the 28 Indian states, eight did not introduce VAT. Haryana
had already adopted it on 1 April 2003.
OECD (2008, 112–13) approvingly cites Chanchal Kumar Sharma (2005) to answer why it has proved so difficult to implement a federal VAT in India. The book says:
Chanchal Kumar Sharma (2005:929) asserts: "political compulsions have led the government to propose an imperfect model of VAT" 'Indian VAT system is imperfect' to the extent it 'goes against the basic premise of VAT'. India seems to have an 'essenceless VAT' because the very reasons for which VAT receives academic support have been disregarded by the VAT-Indian Style, namely: removal of the distortions in movement of goods across states; Uniformity in tax structure. Chanchal Kumar Sharma (2005:929) clearly states, "Local or state level taxes like octroi
, entry tax, lease tax, workers contract tax, entertainment tax and luxury tax are not integrated into the new regime, which goes against the basic premise of VAT, which is to have uniformity in the tax structure. The fact that no tax credit will be allowed for inter-state trade seriously undermines the basic benefit of enforcing a VAT system, namely the removal of the distortions in movement of goods across the states."
"Even the most essential prerequisite for success of VAT i.e. elimination of [Central sales tax (CST)] has been deferred. CST is levied on basis of origin and collected by the exporting state; the consumers of the importing state bear its incidence. CST creates tax barriers to integrate the Indian market and leads to cascading impact on cost of production. Further, the denial of input tax credit on inter-state sales and inter state transfers would affect free flow of goods." (Sharma,2005:922)
The greatest challenge in India, asserts Sharma (2005) is to design a sales tax system that will provide autonomy to subnational levels to fix tax rate, without compromising efficiency or creating enforcement problems.
, the Andhra Pradesh Value Added Tax Act, 2005 came into force on 1 April 2005 and contains six schedules.
Schedule I contains goods generally exempted from tax. Schedule II deals with zero rated transactions like exports.
Schedule III contains goods taxable at 1%, namely jewellery made from bullion and precious stones. Goods taxable at 4% are listed under Schedule IV. The majority of foodgrains and goods of national importance, like iron and steel, are listed under this head. Schedule V deals with Standard Rate Goods, taxable at 14.5%. All goods that are not listed elsewhere in the Act fall under this head. The VI Schedule contains goods taxed at special rates, such as some liquor and petroleum products.
The Act prescribes threshold limits for VAT registration – dealers with a taxable turnover of over Rs.40.00 lacs, in a tax period of 12 months, are mandatorily registered as VAT dealers. Dealers with a taxable turnover, in a tax period of 12 months, between Rs.5.00 to 40.00 lacs are registered as Turnover Tax (TOT) dealers. While the former category of dealers are eligible for input tax credit, the latter category of dealers are not. A VAT dealer pays tax at the rate specified in the Schedules. The sales of a TOT dealer are all taxable at 1%. A VAT dealer has to file a monthly return disclosing purchases and sales. A TOT dealer has to file a quarterly return disclosing only sale turnovers. While a VAT dealer can buy goods for business from anywhere in the country, a TOT dealer is barred from buying outside the State of A.P.
The Act appears to be the most liberal VAT law in India. It has simplified the registration procedures and provides for across the board input tax credit (with a few exceptions) for business transactions. A unique feature of registration in Andhra Pradesh is the facility of voluntary VAT registration and input tax credit for start-ups.
The act not only provides for tax refunds for exporters (refund of tax paid on inputs used in the manufacture of goods exported) but also provides for refund of tax in cases where the inputs are taxed at 12.5% and outputs are taxed at 4%.
In particular, the United Arab Emirates (UAE) has clarified that government officials are studying the situation and considering implementation of a Value Added Tax.
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 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 December 29, 1978 the Federal government published the official application of the tax beginning on January 1, 1980 in the Official Journal of the Federation.
As of 2010, the general VAT rate is 16%. This rate is applied all over Mexico except for bordering regions ( i.e. the United States border, or Belize and Guatemala), where the rate is 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.
(combined GST and provincial sales tax) is collected in New Brunswick, Newfoundland (13%), Nova Scotia (15%), Ontario (13%) and, for a short time until 2013, British Columbia (12%). Advertised prices for goods generally do not include taxes; instead, tax is calculated at the cash register. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt.
charged to the end buyer only. Unlike in the VAT, wholesale sales and sales of raw materials or unfinished goods are not taxed. A common misconception is that sales to businesses are untaxed. Sales to businesses are taxed if the business (or its workers) are the end users of a consumer good.
State sales taxes range from 0%–13% and municipalities often add an additional tax in the form of a local sales tax. In most stores, the price tags and/or advertised prices do not include the taxes, and the taxes are added at the cash register before the customer pays. The states of Delaware
, Montana
, New Hampshire
and Oregon
do not have a sales tax. Alaska
also has no sales tax, but it may be imposed locally. Some states levy sales tax on intangible services (labor, shipping, etc.), while others do not. In many states, a use tax
is imposed where either no or a lower out-of-state sales tax was collected. This includes goods purchased or shipped from another state (unless an equal or higher tax was collected there). Most often, no sales tax is collected on goods shipped from one state to another, even if both states have a sales tax, unless the business also has a physical presence in the consumer's state. (Legal definitions vary on what exactly "physical presence" means.) Use tax is often ignored by consumers, and rarely enforced by the states. Sales and use taxes are a key difference between taxes levied on goods throughout most of the United States, and the value added tax system in other countries.
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 August 9, 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which was replaced by the Michigan Business Tax on January 1, 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.
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. In 1969 Nixon established a task force on business taxation to look at business tax policy. Most of the task force concluded that VAT shouldn’t be adopted as a substitute, in whole or in part, for the existing federal tax structure.
In October 2009, then-House Speaker Nancy Pelosi
stated that a new, national VAT was "on the table" to help the federal government garner needed revenues. After her speech, the Americans for Tax Reform
group urged the public to contact their members of Congress to oppose this potential measure. President
Barack Obama
was reported to be open to a national VAT. One day later, US Treasury Secretary Tim Geithner stated that President Obama does not support a VAT for the US.
Robert J. Samuelson
has estimated that, in order to cover the projected increase in government spending by 2020, a VAT would need to be about 16%. Although an 8% VAT would theoretically suffice, there would be huge pressures to exempt groceries, rent and housing, health care, education, and charitable groups.
Manufacturers in the United States are at a great competitive disadvantage to foreign manufacturers since input VAT is refunded to foreign businesses which export goods to the USA from countries which have VAT. On the other hand, import of US goods to these countries is subject to VAT. VAT taxes rebated on exports and assessed on imports resulted in an estimated $518 billion dollar “border tax” disadvantage to US producers and service providers in 2008 alone. Amerian Manufacturing Trade Action Coalition believes the border tax disadvantage is the greatest contributing factor to the $5.8 trillion US current account deficit for the decade of the 2000s. Noting this, AMTAC strongly supports enactment of legislation that would negate the border tax disadvantage to US producers and service providers. Such legislation would need two basic components. First, it would direct the United States Trade Representative (USTR) to negotiate a remedy for the border tax inequity through the WTO by a date certain. Second, if there is no negotiated solution by that specified date, the United States then would begin charging an offsetting tax on goods and services at the US border equal to the VAT rebated by the exporting country. The US government would also rebate taxes to US companies exporting goods to foreign countries at the same rate as those countries impose a VAT at their borders. Congressmen Bill Pascrell has introduced legislation along these lines as H.R. 2927, the Border Tax Equity Act.
purposes, i.e. entered into an official VAT payers register of a country. Both natural persons and legal entities can be VAT registered. Countries that use VAT have established different thresholds for remuneration derived by natural persons/legal entities during a calendar year (or a different period), by exceeding which the VAT registration is compulsory. Natural persons/legal entities that are VAT registered are obliged to calculate VAT on certain goods/services that they supply and pay VAT into a particular state budget. VAT registered persons/entities are entitled to a VAT deduction under legislative regulations of a particular country. The introduction of a VAT can reduce the cash economy because businesses that wish to buy and sell with other VAT registered businesses must themselves be VAT registered.
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The "value added
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
Maurice Lauré
Maurice Lauré
Maurice Lauré is primarily known for creating the taxe sur la valeur ajoutée ....
, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 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.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax—persuade the seller that he (the buyer) is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, but the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer.
Comparison with a sales tax
Value added tax (VAT) in theory 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 favour 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 purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross marginGross margin
Gross margin is the difference between revenue and cost before accounting for certain other costs...
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 a loss 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 difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand
Goods and Services Tax (New Zealand)
Goods and Services Tax is a value added tax introduced in New Zealand on 1 October 1986 at 10%. It later increased to 12.5% on 1 July 1989 and was further increased to 15% on 1 October 2010....
, 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
Missing trader fraud
Missing trader fraud is the theft of Value Added Tax from a government by organised crime gangs who exploit the way VAT is treated within multi-jurisdictional trading where the movement of goods between jurisdictions is VAT-free...
, which can be very expensive in terms of loss of tax incomes for states.
Principle of VAT
The standard way to implement a VAT involves assuming a business owes some percentage on the price of the product minus all taxes previously paid on the good. If VAT rates were 10%, an orange juice maker would pay 10% of the £5 per litre.Basis for VATs
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.
Example
Consider the manufacture and sale of any item, which in this case we will call a widgetPlaceholder name
Placeholder names are words that can refer to objects or people whose names are either temporarily forgotten, irrelevant, or unknown in the context in which they are being discussed...
. In what follows, the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel.
Without any tax
- A widget manufacturerManufacturingManufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
spends $1.00 on raw materialRaw materialA raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude...
s and uses them to make a widget. - The widget is sold wholesaleWholesaleWholesaling, jobbing, or distributing is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services...
to a widget retailer for $1.20, making a gross margin of $0.20 - The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30
With a North American (Canadian provincial and U.S. state) sales tax
With a 10% sales tax:- The manufacturer pays $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 + ($1.50 x 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 only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.
This is, of course, all theory. In practice a retailer specializes in sales to consumers. Retailers tend to sell a large variety of products and have enough on hand for their trade until the next supply shipment comes in, but not enough on hand, for example, to sell 100,000 widgets to one customer. In another example, for clarification, a consumer cannot wander into a grocery store and make a point-of-sale purchase for 10,000 rolls of toilet paper. On the other hand, there is nothing to prevent a nonconsumer from avoiding tax at "retail" establishments that cater to both consumers and non-end-users. However the burden is on the non-end-users to provide the business license, exemption certificate, etc., necessary for exemption from sales taxes ordinarily collected by the retail establishment.
A large exception to this state of affairs which is growing exponentially is online sales. Typically if the online retail firm has no "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 sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation.
With a value added tax
With a 10% VAT:- The manufacturer pays $1.10 ($1 + ($1 × 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10.
- The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 × 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 – $0.02 – $1.10 = $0.20)
- The retailer charges the consumer $1.65 ($1.50 + ($1.50 × 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 – $0.03 – $1.32 = $0.30).
- The manufacturer and retailer realize less gross margin from a percentage perspective.
With VAT, the consumer has paid, and the government received, the same as with 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. If you calculate the added overhead required to collect VAT, businesses collecting VAT have less profits overall than businesses collecting sales tax.
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.
There are no problems with online sales from businesses located within the country under a national VAT system . All buyers pay VAT and if the buyer is a company, they deduct the VAT. A company can buy consumer items they need in small quantities, like coffee and toilet paper, in a shop without certifying they are not a consumer.
Limitations to example and VAT
In the above example, 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 fundamentals of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
suggest 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
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
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.
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
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
. The income lost by the economy is greater than the government's income; the tax is inefficient. 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 above diagram,
- 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
Criticisms
The "value added tax" has been criticized as the burden of it relies on personal end-consumers of products. Some critics consider it to be a regressive taxRegressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...
, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value added tax is in fact a proportional tax
Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...
in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor.
Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.
Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the VAT on these inputs (unless of course the carpenter also has at least some jobs done with receipt, and claims all purchased inputs to go to those jobs). While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems.
Because exports are generally zero-rated
Zero-rated supply
In economics, zero-rated supply refers to items that are taxable, but the rate of tax is nil on their input supplies. The term is applied to items that would normally be taxed under valued-added systems such as Europe's Value Added Tax or Canada's Goods and Services Tax...
(and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips
Integrated circuit
An integrated circuit or monolithic integrated circuit is an electronic circuit manufactured by the patterned diffusion of trace elements into the surface of a thin substrate of semiconductor material...
or mobile phones) are transported from one member state to another. During these transactions, some companies owe VAT, others acquire a right to reclaim VAT. The first companies, called 'missing traders' go bankrupt without paying. The second group of companies can 'pump' money straight out of the national treasuries.
This kind of fraud originated in the 1970s in the Benelux
Benelux
The Benelux is an economic union in Western Europe comprising three neighbouring countries, Belgium, the Netherlands, and Luxembourg. These countries are located in northwestern Europe between France and Germany...
-countries. Today, the British treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
is a large victim. There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
, the major owner of a limited company is personally responsible for taxes. This is circumvented by having an unemployed person without assets as the formal owner.
Under a sales tax system, only businesses selling to the end-user are required to collect tax, and bear the accounting cost of collecting the tax. Under VAT, however, manufacturers and wholesale companies also have to hire accountants and incur accounting expenses to handle the additional paperwork required for collecting VAT, increasing overhead costs that in turn get incorporated into the cost of the item, possibly creating a cascading effect of higher prices throughout the chain of production. Manufacturers and wholesalers have a choice of retaining less profits overall, or passing on the additional cost to their customers in the form of increased prices.
European Union
The European Union value added taxEuropean Union Value Added Tax
The European Union value added tax is the system of value added tax adopted by nations in the EU VAT area. The European Union itself does not collect the tax, but EU member states are each required to adopt a VAT that complies with the EU VAT system...
(EU VAT) is a value added tax encompassing member states in the European Union VAT area. Joining in this is compulsory for member states
Member State of the European Union
A member state of the European Union is a state that is party to treaties of the European Union and has thereby undertaken the privileges and obligations that EU membership entails. Unlike membership of an international organisation, being an EU member state places a country under binding laws in...
of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. 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 as set out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does allow Member States some degree of flexibility in implementation of VAT legislation. For example different rates of VAT are allowed in different EU member states. However Directive 2006/112 requires Member states to have a minimum standard rate of VAT of 15% and one or two reduced rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies- these Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). The current maximum rate in operation in the EU is 25%, though member states are free to set higher rates.
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.
The VAT Directive (prior to 1 January 2007 referred to as the Sixth VAT Directive) requires certain goods and services to 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). Input VAT that is attributable to exempt supplies 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).
The Nordic countries
MOMS , (bokmålBokmål
Bokmål is one of two official Norwegian written standard languages, the other being Nynorsk. Bokmål is used by 85–90% of the population in Norway, and is the standard most commonly taught to foreign students of the Norwegian language....
) or meirverdiavgift (nynorsk
Nynorsk
Nynorsk or New Norwegian is one of two official written standards for the Norwegian language, the other being Bokmål. The standard language was created by Ivar Aasen during the mid-19th century, to provide a Norwegian alternative to the Danish language which was commonly written in Norway at the...
) (abbreviated MVA), (earlier mervärdesomsättningsskatt), (abbreviated VSK), (abbreviated MVG) or Finnish
Finnish language
Finnish is the language spoken by the majority of the population in Finland Primarily for use by restaurant menus and by ethnic Finns outside Finland. It is one of the two official languages of Finland and an official minority language in Sweden. In Sweden, both standard Finnish and Meänkieli, a...
: arvonlisävero (abbreviated ALV) are the Nordic terms for VAT
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
. Like other countries' sales and VAT taxes, it is an indirect tax
Indirect tax
The term indirect tax has more than one meaning.In the colloquial sense, an indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax...
.
In Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. 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
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
and Sweden. 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
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, the standard rate of VAT is 23% as of 1 July 2010 (raised from previous 22%), along with all other VAT rates, excluding the zero rate. In addition, two reduced rates are in use: 13% (reduced in October 2009 from 17% to 12% for non-restaurant food, increased to 13% from July 2010, also encompasses restaurant food from July 2010), which is applied on food and animal feed, and 9%, (increased from 8% July 2010) 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.
In Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
, VAT is split into two levels: 25.5% for most goods and services but 7% for certain goods and services.
The 7% level is applied for hotel and guesthouse stays, licence fees for radio stations (namely RÚV
RÚV
Ríkisútvarpið is Iceland's national public-service broadcasting organization.Operating from studios in the country's capital, Reykjavík, as well as regional centres around the country, the service broadcasts a variety of general programming to a wide audience across the whole country via radio...
), newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption (but not alcoholic beverages), access to toll road
Toll road
A toll road is a privately or publicly built road for which a driver pays a toll for use. Structures for which tolls are charged include toll bridges and toll tunnels. Non-toll roads are financed using other sources of revenue, most typically fuel tax or general tax funds...
s and music.
In Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, VAT is split into three levels: 25% general rate, 14% on foodstuffs and 8% on 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 license. 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
Svalbard
Svalbard is an archipelago in the Arctic, constituting the northernmost part of Norway. It is located north of mainland Europe, midway between mainland Norway and the North Pole. The group of islands range from 74° to 81° north latitude , and from 10° to 35° east longitude. Spitsbergen is the...
has no VAT because of a clause in the Svalbard Treaty
Svalbard Treaty
The Treaty between Norway, The United States of America, Denmark, France, Italy, Japan, the Netherlands, Great Britain and Ireland and the British overseas Dominions and Sweden concerning Spitsbergen signed in Paris 9th February 1920, commonly called the Svalbard Treaty or the Spitsbergen Treaty...
.
In Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
, VAT is split into three levels: 25% for most goods and services including restaurants bills, 12% for foods (incl. bring home from restaurants) and hotel stays (but breakfast at 25%) 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.
| Year | Tax level (Denmark) | Name |
| 1962 | 9% | OMS |
| 1967 | 10% | MOMS |
| 1968 | 12.5% | MOMS |
| 1970 | 15% | MOMS |
| 1977 | 18% | MOMS |
| 1978 | 20.25% | MOMS |
| 1980 | 22% | MOMS |
| 1992 | 25% | MOMS |
India
VAT was introduced into the Indian taxation system from 1 April 2005.Of the 28 Indian states, eight did not introduce VAT. Haryana
Haryana
Haryana is a state in India. Historically, it has been a part of the Kuru region in North India. The name Haryana is found mentioned in the 12th century AD by the apabhramsha writer Vibudh Shridhar . It is bordered by Punjab and Himachal Pradesh to the north, and by Rajasthan to the west and south...
had already adopted it on 1 April 2003.
OECD (2008, 112–13) approvingly cites Chanchal Kumar Sharma (2005) to answer why it has proved so difficult to implement a federal VAT in India. The book says:
"Although the implementation of broad-base federal VAT system has been considered as the most desirable consumption tax for India since the early 1990s, such a reform would involve serious problems for the finances of regional governments. In addition, implementing VAT in India in context of current economic reforms would have paradoxical dimensions for Indian federalism. On one hand economic reforms have led to decentralization of expenditure responsibilities, which in turn demands more decentralization of revenue raising power if fiscal accountability is to be maintained. On the other hand, implementing VAT (to make India a single integrated market) would lead to revenue losses for the States and reduce their autonomy indicating greater centralization" (Sharma, 2005, as quoted in OECD, 2008, 112–13) Google Books
Chanchal Kumar Sharma (2005:929) asserts: "political compulsions have led the government to propose an imperfect model of VAT" 'Indian VAT system is imperfect' to the extent it 'goes against the basic premise of VAT'. India seems to have an 'essenceless VAT' because the very reasons for which VAT receives academic support have been disregarded by the VAT-Indian Style, namely: removal of the distortions in movement of goods across states; Uniformity in tax structure. Chanchal Kumar Sharma (2005:929) clearly states, "Local or state level taxes like octroi
Octroi
Octroi is a local tax collected on various articles brought into a district for consumption.-Antiquity:Octroi taxes have a respectable antiquity, being known in Roman times as vectigalia...
, entry tax, lease tax, workers contract tax, entertainment tax and luxury tax are not integrated into the new regime, which goes against the basic premise of VAT, which is to have uniformity in the tax structure. The fact that no tax credit will be allowed for inter-state trade seriously undermines the basic benefit of enforcing a VAT system, namely the removal of the distortions in movement of goods across the states."
"Even the most essential prerequisite for success of VAT i.e. elimination of [Central sales tax (CST)] has been deferred. CST is levied on basis of origin and collected by the exporting state; the consumers of the importing state bear its incidence. CST creates tax barriers to integrate the Indian market and leads to cascading impact on cost of production. Further, the denial of input tax credit on inter-state sales and inter state transfers would affect free flow of goods." (Sharma,2005:922)
The greatest challenge in India, asserts Sharma (2005) is to design a sales tax system that will provide autonomy to subnational levels to fix tax rate, without compromising efficiency or creating enforcement problems.
The Andhra Pradesh experience
In the Indian state of Andhra PradeshAndhra Pradesh
Andhra Pradesh , is one of the 28 states of India, situated on the southeastern coast of India. It is India's fourth largest state by area and fifth largest by population. Its capital and largest city by population is Hyderabad.The total GDP of Andhra Pradesh is $100 billion and is ranked third...
, the Andhra Pradesh Value Added Tax Act, 2005 came into force on 1 April 2005 and contains six schedules.
Schedule I contains goods generally exempted from tax. Schedule II deals with zero rated transactions like exports.
Schedule III contains goods taxable at 1%, namely jewellery made from bullion and precious stones. Goods taxable at 4% are listed under Schedule IV. The majority of foodgrains and goods of national importance, like iron and steel, are listed under this head. Schedule V deals with Standard Rate Goods, taxable at 14.5%. All goods that are not listed elsewhere in the Act fall under this head. The VI Schedule contains goods taxed at special rates, such as some liquor and petroleum products.
The Act prescribes threshold limits for VAT registration – dealers with a taxable turnover of over Rs.40.00 lacs, in a tax period of 12 months, are mandatorily registered as VAT dealers. Dealers with a taxable turnover, in a tax period of 12 months, between Rs.5.00 to 40.00 lacs are registered as Turnover Tax (TOT) dealers. While the former category of dealers are eligible for input tax credit, the latter category of dealers are not. A VAT dealer pays tax at the rate specified in the Schedules. The sales of a TOT dealer are all taxable at 1%. A VAT dealer has to file a monthly return disclosing purchases and sales. A TOT dealer has to file a quarterly return disclosing only sale turnovers. While a VAT dealer can buy goods for business from anywhere in the country, a TOT dealer is barred from buying outside the State of A.P.
The Act appears to be the most liberal VAT law in India. It has simplified the registration procedures and provides for across the board input tax credit (with a few exceptions) for business transactions. A unique feature of registration in Andhra Pradesh is the facility of voluntary VAT registration and input tax credit for start-ups.
The act not only provides for tax refunds for exporters (refund of tax paid on inputs used in the manufacture of goods exported) but also provides for refund of tax in cases where the inputs are taxed at 12.5% and outputs are taxed at 4%.
Gulf Cooperation Council
Increased growth and pressure on the GCC's governments to provide infrastructure to support growing urban centers, the Member States of the Persian Gulf Cooperation Treaty, which together make up the Gulf Cooperation Council (GCC), have felt the need to introduce a tax system in the region.In particular, the United Arab Emirates (UAE) has clarified that government officials are studying the situation and considering implementation of a Value Added Tax.
Mexico
Value added tax is a tax applied in MexicoMexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
and other countries of Latin America. In Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
it is also called Impuesto al Valor Agregado and in Peru
Peru
Peru , officially the Republic of Peru , is a country in western South America. It is bordered on the north by Ecuador and Colombia, on the east by Brazil, on the southeast by Bolivia, on the south by Chile, and on the west by the Pacific Ocean....
it is called Impuesto General a las Ventas or IGV.
Prior to the IVA, a sales tax 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 December 29, 1978 the Federal government published the official application of the tax beginning on January 1, 1980 in the Official Journal of the Federation.
As of 2010, the general VAT rate is 16%. This rate is applied all over Mexico except for bordering regions ( i.e. the United States border, or Belize and Guatemala), where the rate is 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.
New Zealand
The goods and services tax (GST) is a value added tax that was introduced in New Zealand in 1986, currently levied 15%. It is notable for exempting few items from the tax. Before the increase on 1 October 2010, GST was fixed at 12.5%.Australia
The goods and services tax (GST) is a value added tax introduced in Australia in 2000, which is collected by seven State and Territory Governments. 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, as well as exemptions for Government charges and fees that are themselves in the nature of taxes.Canada
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 TaxHarmonized Sales Tax
The Harmonized Sales Tax is the name used in Canada to describe the combination of the federal Goods and Services Tax and the regional Provincial Sales Tax into a single value added sales tax in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, British...
(combined GST and provincial sales tax) is collected in New Brunswick, Newfoundland (13%), Nova Scotia (15%), Ontario (13%) and, for a short time until 2013, British Columbia (12%). Advertised prices for goods generally do not include taxes; instead, tax is calculated at the cash register. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt.
United States
Most states have a retail sales taxSales taxes in the United States
There is no federal sales or use tax in the United States. 45 states and the District of Columbia impose sales and use taxes on the retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose additional local...
charged to the end buyer only. Unlike in the VAT, wholesale sales and sales of raw materials or unfinished goods are not taxed. A common misconception is that sales to businesses are untaxed. Sales to businesses are taxed if the business (or its workers) are the end users of a consumer good.
State sales taxes range from 0%–13% and municipalities often add an additional tax in the form of a local sales tax. In most stores, the price tags and/or advertised prices do not include the taxes, and the taxes are added at the cash register before the customer pays. The states of Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
, Montana
Montana
Montana is a state in the Western United States. The western third of Montana contains numerous mountain ranges. Smaller, "island ranges" are found in the central third of the state, for a total of 77 named ranges of the Rocky Mountains. This geographical fact is reflected in the state's name,...
, New Hampshire
New Hampshire
New Hampshire is a state in the New England region of the northeastern United States of America. The state was named after the southern English county of Hampshire. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Atlantic Ocean to the east, and the Canadian...
and Oregon
Oregon
Oregon is a state in the Pacific Northwest region of the United States. It is located on the Pacific coast, with Washington to the north, California to the south, Nevada on the southeast and Idaho to the east. The Columbia and Snake rivers delineate much of Oregon's northern and eastern...
do not have a sales tax. Alaska
Alaska
Alaska is the largest state in the United States by area. It is situated in the northwest extremity of the North American continent, with Canada to the east, the Arctic Ocean to the north, and the Pacific Ocean to the west and south, with Russia further west across the Bering Strait...
also has no sales tax, but it may be imposed locally. Some states levy sales tax on intangible services (labor, shipping, etc.), while others do not. In many states, a use tax
Use tax
A use tax is a type of excise tax levied in the United States. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state , regardless of where the purchase took place...
is imposed where either no or a lower out-of-state sales tax was collected. This includes goods purchased or shipped from another state (unless an equal or higher tax was collected there). Most often, no sales tax is collected on goods shipped from one state to another, even if both states have a sales tax, unless the business also has a physical presence in the consumer's state. (Legal definitions vary on what exactly "physical presence" means.) Use tax is often ignored by consumers, and rarely enforced by the states. Sales and use taxes are a key difference between taxes levied on goods throughout most of the United States, and the value added tax system in other countries.
The state of Michigan
Michigan
Michigan is a U.S. state located in the Great Lakes Region of the United States of America. The name Michigan is the French form of the Ojibwa word mishigamaa, meaning "large water" or "large lake"....
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 August 9, 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which was replaced by the Michigan Business Tax on January 1, 2008.
The state of Hawaii has a 4% General Excise Tax
Gross receipts tax
A gross receipts tax or gross excise tax is a tax on the total gross revenues of a company, regardless of their source. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or service consumers...
(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.
Soon after President Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
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. In 1969 Nixon established a task force on business taxation to look at business tax policy. Most of the task force concluded that VAT shouldn’t be adopted as a substitute, in whole or in part, for the existing federal tax structure.
In October 2009, then-House Speaker Nancy Pelosi
Nancy Pelosi
Nancy Patricia D'Alesandro Pelosi is the Minority Leader of the United States House of Representatives and served as the 60th Speaker of the United States House of Representatives from 2007 to 2011...
stated that a new, national VAT was "on the table" to help the federal government garner needed revenues. After her speech, the Americans for Tax Reform
Americans for Tax Reform
Americans for Tax Reform is an advocacy group and taxpayer group whose stated goal is "a system in which taxes are simpler, flatter, more visible, and lower than they are today. The government's power to control one's life derives from its power to tax...
group urged the public to contact their members of Congress to oppose this potential measure. President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
was reported to be open to a national VAT. One day later, US Treasury Secretary Tim Geithner stated that President Obama does not support a VAT for the US.
Robert J. Samuelson
Robert J. Samuelson
Robert Jacob Samuelson is a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers...
has estimated that, in order to cover the projected increase in government spending by 2020, a VAT would need to be about 16%. Although an 8% VAT would theoretically suffice, there would be huge pressures to exempt groceries, rent and housing, health care, education, and charitable groups.
Manufacturers in the United States are at a great competitive disadvantage to foreign manufacturers since input VAT is refunded to foreign businesses which export goods to the USA from countries which have VAT. On the other hand, import of US goods to these countries is subject to VAT. VAT taxes rebated on exports and assessed on imports resulted in an estimated $518 billion dollar “border tax” disadvantage to US producers and service providers in 2008 alone. Amerian Manufacturing Trade Action Coalition believes the border tax disadvantage is the greatest contributing factor to the $5.8 trillion US current account deficit for the decade of the 2000s. Noting this, AMTAC strongly supports enactment of legislation that would negate the border tax disadvantage to US producers and service providers. Such legislation would need two basic components. First, it would direct the United States Trade Representative (USTR) to negotiate a remedy for the border tax inequity through the WTO by a date certain. Second, if there is no negotiated solution by that specified date, the United States then would begin charging an offsetting tax on goods and services at the US border equal to the VAT rebated by the exporting country. The US government would also rebate taxes to US companies exporting goods to foreign countries at the same rate as those countries impose a VAT at their borders. Congressmen Bill Pascrell has introduced legislation along these lines as H.R. 2927, the Border Tax Equity Act.
EU countries
| Country | Standard rate | Reduced rate | Abbr. | Name |
|---|---|---|---|---|
| 20% | 12% or 10% | MwSt./USt. | Mehrwertsteuer/Umsatzsteuer | |
| 21% | 12% or 6% or 0% in some cases | BTW TVA MWSt |
Belasting over de toegevoegde waarde Taxe sur la Valeur Ajoutée Mehrwertsteuer |
|
| 20% | 7% or 0% | ДДС | Данък добавена стойност | |
| 15% | 5% (8% for taxi and bus transportation) | ΦΠΑ | Φόρος Προστιθέμενης Αξίας | |
| 20% | 10% | DPH | Daň z přidané hodnoty | |
| 25% | 0% | moms | Meromsætningsafgift | |
| 20% | 9% | km | käibemaks | |
| 23% | 13% or 9% | ALV Moms |
Arvonlisävero (Finnish) Mervärdesskatt (Swedish) |
|
| % | % or 2.1% | TVA | Taxe sur la valeur ajoutée | |
| 19% (Helgoland 0%) | 7% or 0% (Helgoland always 0%) | MwSt./USt. | Mehrwertsteuer/Umsatzsteuer | |
| 23% (16% on Aegean islands) |
13% (6.5% for hotels and pharmacies) (8% and 4% on Aegean islands) |
ΦΠΑ | Φόρος Προστιθέμενης Αξίας | |
| 25% (27% from 1 January 2012) | 18% or 5% | ÁFA | Általános forgalmi adó | |
| 21% | % or 9.0% or 4.8% or 0% | CBL VAT |
Cáin Bhreisluacha (Irish) Value Added Tax (English) |
|
| 21% | 10% or 4% | IVA | Imposta sul Valore Aggiunto | |
| 22% | 12% or 0% | PVN | Pievienotās vērtības nodoklis | |
| 21% | 9% or 5% | PVM | Pridėtinės vertės mokestis | |
| 15% | 12% or 9% or 6% or 3% | TVA | Taxe sur la Valeur Ajoutée | |
| 18% | 5% or 0% | VAT | Taxxa tal-Valur Miżjud | |
| 19% | 6% or 0% | BTW | Belasting over de toegevoegde waarde | |
| 23% | 8% or 5% or 0% | PTU/VAT | Podatek od towarów i usług | |
| 23% 15% in Madeira Madeira Madeira is a Portuguese archipelago that lies between and , just under 400 km north of Tenerife, Canary Islands, in the north Atlantic Ocean and an outermost region of the European Union... and Azores Azores The Archipelago of the Azores is composed of nine volcanic islands situated in the middle of the North Atlantic Ocean, and is located about west from Lisbon and about east from the east coast of North America. The islands, and their economic exclusion zone, form the Autonomous Region of the... (Minimum 70% of mainland rate) |
13% or 6% 8% or 4% in Madeira Madeira Madeira is a Portuguese archipelago that lies between and , just under 400 km north of Tenerife, Canary Islands, in the north Atlantic Ocean and an outermost region of the European Union... and Azores Azores The Archipelago of the Azores is composed of nine volcanic islands situated in the middle of the North Atlantic Ocean, and is located about west from Lisbon and about east from the east coast of North America. The islands, and their economic exclusion zone, form the Autonomous Region of the... (Minimum 70% of mainland rate) |
IVA | Imposto sobre o Valor Acrescentado | |
| 24% | 9% or 5% for first time buyers of new homes under special conditions | TVA | Taxa pe valoarea adăugată | |
| 20% | 10% | DPH | Daň z pridanej hodnoty | |
| 20% | % | DDV | Davek na dodano vrednost | |
| 18% 5% in Canary Islands Canary Islands The Canary Islands , also known as the Canaries , is a Spanish archipelago located just off the northwest coast of mainland Africa, 100 km west of the border between Morocco and the Western Sahara. The Canaries are a Spanish autonomous community and an outermost region of the European Union... |
8% or 4% 2% or 0% in Canary Islands Canary Islands The Canary Islands , also known as the Canaries , is a Spanish archipelago located just off the northwest coast of mainland Africa, 100 km west of the border between Morocco and the Western Sahara. The Canaries are a Spanish autonomous community and an outermost region of the European Union... |
IVA IGIC |
Impuesto sobre el Valor Añadido Impuesto General Indirecto Canario |
|
| 25% | 12% or 6% | Moms | Mervärdesskatt | |
| 20% | 5% or 0% | VAT | Value Added Tax |
Non-EU countries
| Country | Standard rate | Reduced rate | Local name |
|---|---|---|---|
| 20% | 10% (pharmacies), 0% | TVSH = Tatimi mbi Vlerën e Shtuar | |
| 4.5% | 1% | IVA = Impost sobre el Valor Afegit | |
| 18% | 10.5% or 0% | ƏDV = Əlavə dəyər vergisi | |
| 21% | 10.5% or 0% | IVA = Impuesto al Valor Agregado | |
| 20% | 0% | AAH = Avelac’vaç aržek’i hark ԱԱՀ = Ավելացված արժեքի հարկ |
|
| 10% | 0% | GST = Goods and Services Tax Goods and Services Tax (Australia) The GST is a broad sales tax of 10% on most goods and services transactions in Australia. It is a value added tax, not a sales tax, in that it is refunded to all parties in the chain of production other than the final consumer.... |
|
| 20% | 10% or 0.5% | ПДВ = Падатак на дададзеную вартасьць | |
| 17.5% | VAT = Value Added Tax | ||
| 17% | 0% | PDV = Porez na dodanu vrijednost | |
| 12% + 25% + 5% | 0% | *IPI – 12% = Imposto sobre produtos industrializados (Tax over industrialized products) – Federal Tax ICMS – 25% = Imposto sobre circulação e serviços (Tax over commercialization and services) – State Tax ISS – 5% = Imposto sobre serviço de qualquer natureza (Tax over any service) – City tax *IPI = Imposto sobre produtos industrializados (Tax over industrialized products) can reach 60% over imported products. |
|
| 13% | IVA = Impuesto al Valor Agregado | ||
| 5% GST+0%–10%PST(HST) | 5%/0%2 | GST = Goods and Services Tax Goods and Services Tax (Canada) The Goods and Services Tax is a multi-level value added tax introduced in Canada on January 1, 1991, by then Prime Minister Brian Mulroney and his finance minister Michael Wilson. The GST replaced a hidden 13.5% Manufacturers' Sales Tax ; Mulroney claimed the GST was implemented because the MST... , TPS = Taxe sur les produits et services; HST1 = Harmonized Sales Tax, TVH = Taxe de vente harmonisée |
|
| 19% | IVA = Impuesto al Valor Agregado | ||
| 16% | IVA = Impuesto al Valor Agregado | ||
| 3 | 17% | 13% for foods, printed matter, and households fuels; 6% or 3% | (pinyin Pinyin Pinyin is the official system to transcribe Chinese characters into the Roman alphabet in China, Malaysia, Singapore and Taiwan. It is also often used to teach Mandarin Chinese and spell Chinese names in foreign publications and used as an input method to enter Chinese characters into... :zēng zhí shuì) |
| 23% | 10% or 0% | PDV = Porez na dodanu vrijednost | |
| 16% | 12% or 0% | ITBIS = Impuesto sobre Transferencia de Bienes Industrializados y Servicios | |
| 12% | IVA = Impuesto al Valor Agregado | ||
| 10% | VAT = Value Added Tax (الضريبة على القيمة المضافة) | ||
| 13% | IVA = Impuesto al Valor Agregado o "Impuesto a la Transferencia de Bienes Muebles y a la Prestación de Servicios" | ||
| 15% | VAT = Value Added Tax | ||
| 15% | 0% | VAT = Value Added Tax | |
| 25% | MVG = Meirvirðisgjald | ||
| 18% | 0% | DGhG = Damatebuli Ghirebulebis gdasakhadi დღგ = დამატებული ღირებულების გადასახადი | |
| 12% | IVA = Impuesto al Valor Agregado | ||
| 16% | 0% | VAT = Value Added Tax | |
| 3% | VAT = Value Added Tax (مالیات بر ارزش افزوده) | ||
| 25.5% | 7%4 | VSK, VASK = Virðisaukaskattur | |
| 5 | 13.5% | 5%, 1%, or 0% | VAT = Valued Added Tax |
| 10% | 5% | PPN = Pajak Pertambahan Nilai | |
| 6 | 16%7(Eilat 0%) | 0% (fruits and vegetables, tourism services, diamonds, flights and apartments renting) | Ma'am = מס ערך מוסף |
| 5% | Consumption tax = 消費税 | ||
| 10% | VAT = 부가세(附加稅, Bugase) = 부가가치세(附加價値稅, Bugagachise) | ||
| 8 | 5% | 0% | GST = Goods and Services Tax |
| 16% | GST = Goods and Sales Tax | ||
| 12% | ҚCҚ = Қосымша салық құны (Kazakh) НДС = Налог на добавленную стоимость (Russian) VAT = Value Added Tax |
||
 Republic of Kosovo |
16% | TVSH = Tatimi mbi Vlerën e Shtuar | |
| 10% | TVA = Taxe sur la valeur ajoutée | ||
| 7.6% | 3.6% (lodging services) or 2.4% | MWST = Mehrwertsteuer | |
| 20% | GST = Goods and Sales Tax (الضريبة على القيمة المضافة) | ||
| 20% | 8%, 5% or 0% | TVA = Taxa pe Valoarea Adăugată | |
| 18% | 5% | ДДВ = Данок на Додадена Вредност, DDV = Danok na Dodadena Vrednost | |
| 9 | 10% | GST = Goods and Services Tax (Government Tax) | |
| 16% | 11%, 0% | IVA = Impuesto al Valor Agregado | |
| 17% | PDV = Porez na dodatu vrijednost | ||
| 15% | VAT = Value Added Tax | ||
| 13% | 0% | VAT = Value Added Taxes | |
| 15% | GST = Goods and Services Tax | ||
| 25% | 14% or 8% | MVA = Merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (informally moms) | |
| 14.5% | VAT = Value Added Tax | ||
| 16% | 1% or 0% | GST = General Sales Tax | |
| 7% | ITBMS = Impuesto de Transferencia de Bienes Muebles y Servicios | ||
| 10% | 5% | IVA= Impuesto al Valor Agregado | |
| 16%+2% | IGV – 16% = Impuesto General a la Ventas IPM – 2% Impuesto de Promocion Municipal | ||
| 12%10 | RVAT = Reformed Value Added Tax, locally known as Karagdagang Buwis / Dungag nga Buhis | ||
| 18% | 10% or 0% | НДС = Налог на добавленную стоимость, NDS = Nalog na dobavlennuyu stoimost’ | |
| 17% | VAT = Value Added Tax | ||
| 18% | 8% or 0% | ПДВ = Порез на додату вредност, PDV = Porez na dodatu vrednost | |
| 7% | GST = Goods and Services Tax Goods and Services Tax (Singapore) Goods and Services Tax in Singapore is a broad-based value added tax levied on import of goods, as well as nearly all supplies of goods and services. The only exemptions are for the sales and leases of residential properties and most financial services... |
||
| 14% | 0% | VAT = Valued Added Tax | |
| 12% | 0% | VAT = Valued Added Tax has been in effect in Sri Lanka since 2001. On the 2001 budget, the rates have been revised to 12% and 0% from the previous 20%, 12% and 0% | |
| 8% | 3.8% (hotel sector) and 2.5% (foods, books, newspapers, medical supplies) | MWST = Mehrwertsteuer, TVA = Taxe sur la valeur ajoutée, IVA = Imposta sul valore aggiunto, TPV = Taglia sin la Plivalur | |
| 5% | |||
| 7% | VAT = Value Added Tax, ภาษีมูลค่าเพิ่ม | ||
| 15% | 0% | ||
| 18% | 8% or 1% | KDV = Katma değer vergisi | |
| 20% (17% from January 2014) | 0% | ПДВ = Податок на додану вартість, PDV = Podatok na dodanu vartist’. | |
| 22% | 10% | IVA = Impuesto al Valor Agregado | |
| 20 % | НДС = Налог на добавленную стоимость | ||
| 10% | 5% or 0% | GTGT = Giá Trị Gia Tăng | |
| 12% | 11% | IVA = Impuesto al Valor Agregado |
VAT registered
VAT registered means registered for VATVat
Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...
purposes, i.e. entered into an official VAT payers register of a country. Both natural persons and legal entities can be VAT registered. Countries that use VAT have established different thresholds for remuneration derived by natural persons/legal entities during a calendar year (or a different period), by exceeding which the VAT registration is compulsory. Natural persons/legal entities that are VAT registered are obliged to calculate VAT on certain goods/services that they supply and pay VAT into a particular state budget. VAT registered persons/entities are entitled to a VAT deduction under legislative regulations of a particular country. The introduction of a VAT can reduce the cash economy because businesses that wish to buy and sell with other VAT registered businesses must themselves be VAT registered.
Countries and territories VAT free
As of november 2011, 11 countries and 9 territories under 2 countries remain VAT free in the World.| Country | remark |
|---|---|
| Gulf Cooperation Council | |
| Gulf Cooperation Council | |
| Gulf Cooperation Council | |
| Gulf Cooperation Council | |
| Gulf Cooperation Council | |
| Gulf Cooperation Council | |
| special administrative region of China | |
| special administrative region of China | |
| British Overseas Territory | |
| British Overseas Territory | |
| British Overseas Territory | |
| British Overseas Territory | |
| British Overseas Territory | |
| British Overseas Territory | |
| British Crown Dependency | |
See also
- Flat taxFlat taxA flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...
- Gross receipts taxGross receipts taxA gross receipts tax or gross excise tax is a tax on the total gross revenues of a company, regardless of their source. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or service consumers...
- Income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
- Land value taxLand value taxA land value tax is a levy on the unimproved value of land. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements...
- List of tax rates around the worldTax rates around the worldComparison of tax rates around the world is difficult and somewhat subjective. Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. The graph below gives an indication by rank of some raw...
- Missing Trader FraudMissing trader fraudMissing trader fraud is the theft of Value Added Tax from a government by organised crime gangs who exploit the way VAT is treated within multi-jurisdictional trading where the movement of goods between jurisdictions is VAT-free...
(Carousel VAT Fraud) - Progressive taxProgressive taxA progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
- Revenue On-Line ServiceRevenue On-Line ServiceThe Revenue On-Line Service , is a pioneer in European internet applications, and it is run by Revenue in the Republic of Ireland. The ROS system allows companies and other business concerns who are liable for tax in the Republic of Ireland to file certain Tax Returns online using a Secure Site...
- Single tax
- Turnover taxTurnover taxA turnover tax is similar to a sales tax or a VAT, with the difference that it taxes intermediate and possibly capital goods. It is an indirect tax, typically on an ad valorem basis, applicable to a production process or stage. For example, when manufacturing activity is completed, a tax may be...
- VAT 3
- VAT identification number
- VAT-free imports from the Channel Islands – low-value products can be imported into the EU from the Channel Islands without paying VAT
- X taxX taxThe X tax is an approach to taxation, United States, that can be described as a standard European-stylecredit-invoice value added tax , except that wages are deducted by businesses and taxed at progressive rates to workers...
External links
- What is VAT? – a general overview from the European Commission
- European VAT Rates
- Can your Company Reclaim VAT? VAT schemes for reclaiming VAT Worldwide
- Consumption Tax Act in Japan
- VAT & sales tax information from the Indian government
- About VAT in India
- The Value Added Tax