Value Added Tax turns 70 today, 10th April 2024. It was introduced in France VAT to a limited number of businesses and supplier as part of a fiscal reform to simplify its jumbled fiscal regime. It was fully implemented across all businesses by the end of the 1960’s.
A value-added tax (VAT), also known as a goods and services tax (GST) in some countries, is a type of tax that is applied incrementally throughout the production and distribution process of a product or service. At each stage, the tax is levied on the price, and if the end consumer is a business, they can reclaim the VAT paid to the government. Unlike a sales tax, VAT is an indirect tax, meaning the burden of the tax is not necessarily borne by the same person who pays it to the tax authorities.
While VAT is not mandatory in all jurisdictions, it is commonly implemented as a destination-based tax, where the tax rate is determined by the consumer’s location and applied to the sales price. The terms VAT, GST, and consumption tax are often used interchangeably. VAT plays a significant role in global tax revenues, accounting for approximately one-fifth of total tax revenues worldwide and among members of the OECD. As of June 2023, 175 out of 193 countries with full UN membership employ a VAT system, with the exception of the United States, where many states utilize a sales tax system instead.
There are two primary methods of calculating VAT: the credit-invoice method and the subtraction method. The credit-invoice method, used by most national VATs except Japan, involves taxing sales transactions, informing customers about the VAT, and allowing businesses to receive a credit for VAT paid on input materials and services. The subtraction method, employed solely by Japan, involves calculating the value of taxable sales, subtracting the sum of taxable purchases, and applying the VAT rate to the difference. Both methods have exceptions for specific goods and transactions to facilitate collection and combat tax fraud and evasion. The subtraction method has also been proposed in recent tax reform discussions in the United States under the name “flat tax.”
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