Value-added tax

German industrialist Georg Wilhelm von Siemens proposed the concept of a value-added tax in 1918 to replace the German turnover tax. However, the turnover tax was not replaced until 1968. The modern variation of VAT was first implemented by Maurice Lauré, joint director of the French tax authority, who implemented VAT on 10 April 1954 in France's Ivory Coast colony. Assessing the experiment as successful, France introduced it domestically in 1958. Initially directed at large businesses, it was extended over time to include all business sectors. In France it is the largest source of state finance, accounting for nearly 50% of state revenues. Following creation of the European Economic Community in 1957, the Fiscal and Financial Committee set up by the European Commission in 1960 under the chairmanship of Professor Fritz Neumark made its priority objective the elimination of distortions to competition caused by disparities in national indirect tax systems. The Neumark Report published in 1962 concluded that France's VAT model would be the simplest and most effective indirect tax system. This led to the EEC issuing two VAT directives, adopted in April 1967, providing a blueprint for introducing VAT across the EEC, following which, other member states (initially Belgium, Italy, Luxembourg, the Netherlands and West Germany) introduced VAT. ==Implementation==

VAT can be accounts-based or invoice-based. All VAT-collecting countries except Japan use the invoice method. Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax). Buyers who themselves add value and resell the product pay VAT on their own sales (output tax). The difference between output tax and input tax is the amount paid to the government (or refunded, in the case of a negative amount). Using accounts, the tax is calculated as a percentage of the difference between sales and purchases from taxed accounts. ==Incentives==

VAT provides an incentive for businesses to register and keep invoices, and it does this in the form of zero-rated goods and VAT exemption on goods not resold. Through registration, a business documents its purchases, making them eligible for a VAT credit. The main benefits of VAT are that in relation to many other forms of taxation, it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue. ==Comparison with sales tax==

Three examples below demonstrate the chain of transactions between the raw materials producer and the final consumer, in which • the government levies no tax • the government levies sales tax • the government levies a Value-Added Tax. Compliance One primary reason for the institution of a VAT versus sales tax is to ensure compliance. Because sales tax is only submitted at the final sale to the consumer, the government has little information to verify that a sale has been made or at what price, making enforcement difficult. The retailer and consumer have an incentive to evade the tax with little risk of discovery. With any transaction, the seller is financially motivated to assume the buyer is an intermediate, not a consumer (and therefore, not subject to the sales tax), even if this may result in illegal tax evasion. By comparison, with VAT every transaction is reported to the government (either through a submission of tax, a reimbursement claim, or both), a trail of information is created for government which helps motivate compliance and facilitate any potential audit. The materials producer, manufacturer, and retailer all know that the others down the chain will submit reimbursement claims, so a failure to report the transaction and pay the tax is likely to draw attention from authorities. Even if retailers evade charging the VAT from the consumer, the government still receives the income at prior stages. Because of the difficulty of exempting intermediate transactions in a sales tax, VAT has been gaining favor over traditional sales taxes. However, it is uncommon for sales taxes to be collected at every stage, as it is only levied as a final tax on the consumer, not the reseller. Governance structure VAT is collected at the national level. In countries such as India and the United States, sales tax is collected at the point of sale by the local jurisdiction, leading them to prefer the latter method. Accounting The main disadvantage of VAT is the extra accounting required by those in the supply chain. However, payment of VAT is made simpler when the VAT system has few, if any, exemptions (such as with GST in New Zealand). == Effects ==

Regressivity VAT has been criticized by opponents as a regressive tax, meaning that the poor pay more, as a percentage of their income, relative to the wealthier individuals, given the higher marginal propensity to consume among the poor. Defenders reply that relating taxation levels to income is an arbitrary standard and that the VAT is in fact a proportional tax. An OECD study found that VAT could even be slightly progressive. VAT's effective regressivity can be reduced by applying a lower rate to products that are more likely to be consumed by the poor. Deadweight loss The incidence of VAT may not fall entirely on consumers as traders tend to absorb VAT so as to maintain sales volumes. Conversely, not all cuts in VAT are passed on in lower prices. VAT consequently leads to a deadweight loss if cutting prices pushes a business below the margin of profitability. The effect can be seen when VAT is cut or abolished. Sweden reduced VAT on restaurant meals from 25% to 12%, creating 11,000 additional jobs. Churning Because VAT is included in the price index to which state benefits such as pensions and welfare payments are linked in some countries, as well as public sector pay, some of the apparent revenue is churned – i.e. taxpayers are given the money to pay the tax, reducing net revenue. Business cashflow Refund delays by the tax administration can damage businesses. Compliance costs Compliance costs are seen as a burden on business. In the UK, compliance costs for VAT have been estimated to be about 4% of the yield, with greater impacts on smaller businesses. 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, manufacturers and wholesale companies also incur accounting expenses to handle the additional paperwork required for collecting VAT, increasing overhead costs and prices. Fraud VAT offers distinctive opportunities for evasion and fraud, especially through abuse of the credit and refund mechanism. VAT overclaim fraud reached as high as 34% in Romania. Exports are generally zero-rated, creating opportunity for fraud. In Europe, the main source of problems is carousel fraud. This fraud originated in the 1970s in the Benelux countries. VAT fraud then became a major problem in the UK. Similar fraud possibilities exist inside a country. To avoid this, countries such as Sweden hold the major owner of a limited company personally responsible. Trade effects If a county's exported goods are exempt from domestic VAT (zero-rated) or VAT rebated, this can motivate an increase in the export of goods. A country's national VAT may been seen as a tariff on imported goods. The American Manufacturing Trade Action Coalition in the United States consider VAT charges on US products when VAT rebates are offered for products from other countries to be an unfair trade practice. AMTAC claims that so-called "border tax disadvantage" is the greatest contributing factor to the US current account deficit, and estimated this disadvantage to US producers and service providers to be $518 billion in 2008 alone. US politicians such as congressman Bill Pascrell, advocate either changing WTO rules relating to VAT or rebating VAT charged on US exporters. A business tax rebate for exports was proposed in the 2016 GOP tax reform policy paper. A 2021 study reported that value-added taxes within the EU were unlikely to distort trade flows. == Around the world ==

Armenia The VAT rate is 20%. However, the expanded application is zero VAT for many operations and transactions. That zero VAT is the source of controversies between its trading partners, mainly Russia, which is against the zero VAT and promotes wider use of tax credits. VAT is replaced with fixed payments, which are utilized for many taxpayers, operations, and transactions. Legislation is based largely on the EU VAT Directive's principles. The system is input-output based. Producers are allowed to subtract VAT on their inputs from the VAT they charge on their outputs and report the difference. The law took effect on January 1, 2022. Australia The goods and services tax (GST) is a VAT introduced in Australia in 2000. Revenue is redistributed to the states and territories via the Commonwealth Grants Commission process. This works as a program of horizontal fiscal equalisation. The rate is set at 10%, although many domestically consumed items are effectively zero-rated (GST-free) such as fresh food, education, health services, certain medical products, as well as government charges and fees that are effectively taxes. Bangladesh VAT was introduced in 1991, replacing sales tax and most excise duties. The Value Added Tax Act, 1991 triggered VAT starting on 10 July 1991, which is observed as National VAT Day. VAT became the largest source of government revenue, totaling about 56%. The standard rate is 15%. Export is zero rated. Several reduced rates, locally called Truncated Rates, apply to service sectors and range from 1.5% to 10%. The Value Added Tax and Supplementary Duty Act of 2012 automated administration. and Value Added Tax and Supplementary Duty Rules, 2016. Anyone who collects VAT becomes a VAT Trustee if they: register and collect a Business Identification Number (BIN) from the NBR; submit VAT returns on time; offer VAT receipts; store all cash-memos; and use the VAT rebate system responsibly. VAT Mentors work in the VAT or Customs department and deal with trustees. The VAT rate is a flat 15%. Barbados VAT was introduced on 1 January 1997 and replaced 11 other taxes. The original rate of 15% was increased to 17.5% in 2011. The rate on restaurant and hotel accommodations is between 10% and 15% while certain foods and goods are zero-rated. The revenue is collected by the Barbados Revenue Authority. Bulgaria VAT was 20% as of 2023. A reduced rate of 9% applies to baby foods and hygiene products, as well as on books. A permanent rate of 9% applies to physical or electronic periodicals, such as newspapers and magazines. Canada Goods and Services Tax (GST) is a national sales tax introduced in 1991 at a rate of 7%, later reduced to 5%. A Harmonized Sales Tax (HST) that combines the GST and provincial sales tax, is collected in New Brunswick (15%), Newfoundland (15%), Nova Scotia (14%), Ontario (13%) and Prince Edward Island (15%), while British Columbia had a 12% HST until 2013. Quebec has a de facto 14.975% HST: it follows the same rules as the GST, and both are collected by Revenu Québec. Advertised and posted prices generally exclude taxes, which are calculated at the time of payment; common exceptions are motor fuels, the posted prices for which include sales and excise taxes, and items in vending machines as well as alcohol in monopoly stores. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are zero-rated. Other provinces that do not have a HST may have a Provincial Sales Tax (PST), which are collected in British Columbia (7%), Manitoba (7%) and Saskatchewan (6%). Alberta and all three territories do not collect either a HST or PST. Chile VAT was introduced in Chile in 1974 under Decreto Ley 825. From 1998 there was implemented a 18% tax. Since October 2003, the standard VAT rate has been 19%, applying to the majority of goods and some services. However certain items have been subjected to additional tax, for instance, alcoholic beverages (between 20.5= – 31.5% for fermented to distilled products), jewellery (15%), pyrotechnic items (50% or more for the first sale or import) or soft drinks with high sugar (18%). AS of 2023, the VAT tax includes majority of services excluding Education, Health and Transport, as well as taxpayers issuing fee receipts. This tax makes the 41.2% of the total revenue of the country. China VAT produces the largest share of China's tax revenue. In 1984 the State Council announced that China would begin collecting VAT. For a decade, it was imposed only on certain categories of goods and at differing rates. European Union The European Union VAT is mandatory for member states of the European Union. The EU VAT asks where supply and consumption occurs, which determines which state collects VAT and at what rate. Each state must comply with EU VAT law, which requires a minimum standard rate of 15% and one or two reduced rates not to be below 5%. Some EU members have a 0% VAT rate on certain items; these states agreed this as part of their accession (for example, newspapers and certain magazines in Belgium). Certain goods and services must be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other items are exempt from VAT by default, but states may opt to charge VAT on them (such as land and certain financial services). Luxembourg charges the lowest rate, 17%, and Hungary charges the highest rate, 27%. Only Denmark has no reduced rate. Gulf Cooperation Council The United Arab Emirates (UAE) on 1 January 2018 implemented VAT. For companies whose annual revenues exceed $102,000 (Dhs 375,000), registration is mandatory. GCC countries agreed to an introductory rate of 5%. Saudi Arabia's VAT system uses a 15% rate. India VAT was introduced on 1 April 2005. Of the then 28 states, eight did not immediately introduce VAT. Rates were 5% and 14.5%. Tamil Nadu introduced VAT on 1 January 2007. Under the BJP government, it was replaced by a national Goods and Services Tax (GST) according to the One Hundred and First Amendment of the Constitution of India. Iran (Islamic Republic Of) Under the Iranian Islamic Resistive economy VAT is universally collected, paid twice 12% by consumer at Point of sale terminals purchases and also by the producers/manufacturers paid electronically at once, around 2% of government VAT profit goes to food electronic coupon stamps National Credit Network program , during Iranian economic crisis in December 2025 in the 2026 fiscal budget it was raised by 3%. Indonesia Italy Israel Japan VAT was implemented in Japan in 1989. Tax authorities debated VAT in the 1960s and 1970s but decided against it at the time. Malaysia Mexico The existing sales tax () was replaced by VAT (, IVA) on 1 January 1980. As of 2010, the general VAT rate was 16%. This rate was applied all over Mexico except for border regions (i.e. the United States border, or Belize and Guatemala), where the rate was 11%. Books, food, and medicines are zero-rated. Some services such as medical care are zero-rated. In 2014 the favorable tax rate for border regions was eliminated and the rate increased to 16% across the country. Nepal New Zealand Nordic countries MOMS (, formerly ), (bokmål) or (nynorsk) (abbreviated MVA), (until the early 1970s labeled as OMS only), (abbreviated VSK), (abbreviated MVG) or Finnish: (abbreviated ALV) are the Nordic terms for VAT. Like other countries' sales and VAT, it is an indirect tax. Denmark has the highest VAT, alongside Norway, Sweden, and Croatia. VAT is generally applied at one rate, 25%, with few exceptions. Services such as public transport, health care, newspapers, rent (the lessor can voluntarily register as a VAT payer, except for residential premises), and travel agencies. In Finland, the standard rate is 25.5%. A 14% rate is applied on groceries, animal feed, and restaurant and catering services. A 10% rate is applied on books, newspapers and magazines, pharmaceutical products, sports and fitness services, entrance fees to cultural, entertainment and sporting events, passenger transport services, accommodation services, and royalties for television and public radio activities. Åland, an autonomous area, is considered to be outside the EU VAT area, although its VAT rate is the same as for Finland. Goods brought from Åland to Finland or other EU countries are considered to be imports. This enables tax-free sales onboard passenger ships. In Iceland, VAT is 24% for most goods and services. An 11% rate is applied for hotel and guesthouse stays, licence fees for radio stations (namely RÚV), newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption (but not alcoholic beverages), access to toll roads and music. In Norway, the general rate is 25%, 15% on foodstuffs, and 12% on hotels and holiday homes, on some transport services, cinemas. Financial services, health services, social services and educational services, newspapers, books and periodicals are zero-rated. Svalbard has no VAT because of a clause in the Svalbard Treaty. In Sweden, VAT is 25% for most goods and services, 12% for foods including restaurants, and hotels. It is 6% for printed matter, cultural services, and transport of private persons. Zero-rated services including public (but not private) education, health, dental care. Dance event tickets are 25%, concerts and stage shows are 6%, while some types of cultural events are 0%. MOMS replaced OMS (Danish , Swedish ) in 1967, which was a tax applied exclusively for retailers. Philippines Poland VAT was introduced in 1993. The standard rate is 23%. Items and services eligible for an 8% include certain food products, newspapers, goods and services related to agriculture, medicine, sport, and culture. The complete list is in Annex 3 to the VAT Act. A 5% applies to basic food items (such as meat, fruits, vegetables, dairy and bakery products), children's items, hygiene products, and books. Exported goods, international transport services, supply of specific computer hardware to educational institutions, vessels, and air transport are zero rated. Taxi services have flat-rate tax of 4%. Flat-rate farmers supplying agricultural goods to VAT taxable entities are eligible for a 7% refund. Romania Value-added tax (in Romanian Taxa pe valoarea adăugată, or TVA) in Romania is a consumption tax charged at a standard rate of 21%. A single reduced rate of 11% applies to most foodstuffs (alcoholic beverages excluded) and utilities. Russia The VAT rate is 20% with exemptions for some services (for example, medical care). VAT payers include organizations (industrial and financial, state and municipal enterprises, institutions, business partnerships, insurance companies and banks), enterprises with foreign investments, individual entrepreneurs, international associations, and foreign entities with operations in the Russian Federation, non-commercial organizations that conduct commercial activities, and those who move goods across the border of the Customs Union. In September 2025 MinFin proposed to raise the VAT rate from 20% to 22% for 2026. Singapore Slovakia The standard rate is 23%. A 5% rate primarily applies to essential goods such as (healthy) food, medicine, and books. Spain South Africa South Africa applies a standard VAT rate of 15%, with specific zero-rated and exempt items; recent case law has clarified the treatment of certain entertainment expenses for VAT input claims. Switzerland and Liechtenstein Taiwan VAT in Taiwan is 5%. It is levied on all goods and services. Exceptions include exports, vessels, aircraft used in international transportation, and deep-sea fishing boats. Trinidad and Tobago VAT is 12.5%. Ukraine United Kingdom The United Kingdom introduced VAT in 1973 after joining the EEC. Others may be exempt. United States In the United States no federal VAT is in effect. Instead, sales and use taxes are used in most states. Puerto Rico replaced its 6% sales tax with a 10.5% VAT beginning 1 April 2016, leaving in place its 1% municipal sales and use tax. Materials imported for manufacturing are exempt. However, two states enacted a form of VAT in lieu of a business income tax. Michigan used a form of VAT known as the "Single Business Tax" (SBT) from 1975 until voter-initiated legislation repealed it, replaced by the Michigan Business Tax in 2008. Hawaii has a 4% General Excise Tax (GET) that is charged on gross business income. Individual counties add a .5% surcharge. Unlike a VAT, rebates are not available, such that items incur the tax each time they are (re)sold. Discussions about a federal VAT Former 2020 Democratic presidential candidate Andrew Yang advocated for a national VAT in order to pay for his universal basic income proposal. A national subtraction-method VAT, often referred to as a "flat tax", has been repeatedly proposed as a replacement of the corporate income tax. A border-adjustment tax (BAT) was proposed by the Republican Party in 2016. Vietnam All organizations and individuals producing and trading VAT taxable goods and services pay VAT, regardless of whether they have Vietnam-resident establishments. Vietnam has three VAT rates: 0 percent, 5 percent and 10 percent. 10 percent is the standard rate. A variety of goods and service transactions qualify for VAT exemption. ==Tax rates==

revenue, in % of GDP, from VAT. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 3% by tax revenue. ==Examples by continent==

European Union countries Non-European Union countries VAT-free countries and territories As of January 2022, the countries and territories listed remained VAT-free. ==See also==