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Value-added tax

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A value-added tax, often called VAT, is a type of consumption tax.

Countries with VAT
Countries with VAT

It is levied on the value added at every stage of a product's production and distribution. This means the tax is applied to the increase in value as a product moves from raw materials to a finished good. VAT is an indirect tax. This means individuals do not pay it directly to the government. Instead, suppliers act as intermediaries. They collect the tax from customers at the point of sale and then remit it to the government.

Most countries use the invoice method to manage VAT.

VAT2b22
VAT2b22

In this system, every seller pays tax on their sales, known as output tax. They then pass an invoice to the buyer. This invoice shows the amount of tax paid, excluding deductions called input tax. Buyers who add value and resell the product also pay output tax. To find the final amount owed to the government, the business subtracts the input tax from the output tax. If the result is negative, the amount is refunded. Some countries use an accounts-based method instead. This calculates tax as a percentage of the difference between sales and purchases from taxed accounts.

There are distinct ways to handle specific goods within this system. Some jurisdictions choose to exempt specific goods and services from the tax entirely. Other countries use a zero-rated system for certain items. Additionally, products exported to other countries are typically exempted. This is often done via a rebate provided to the exporter. VAT is usually implemented as a destination-based tax. This means the specific tax rate is determined by the location of the customer.

Vatratee
Vatratee

This ensures the tax is tied to where the consumption actually happens.

The history of VAT began with early ideas and successful experiments.

Btw
Btw

In 1918, German industrialist Georg Wilhelm von Siemens proposed the concept. He wanted to replace the German turnover tax. However, that change did not happen until 1968. The modern version of VAT was first implemented by Maurice Lauré. He was a joint director of the French tax authority. On April 10, 1954, he implemented VAT in France's Ivory Coast colony. France found this experiment successful. Consequently, France introduced the tax domestically in 1958. It is now France's largest source of state finance, accounting for nearly 50% of its revenues.

In Europe, the system grew through organized cooperation. After the European Economic Community was created in 1957, a committee was set up in 1960. This committee was led by Professor Fritz Neumark. Their goal was to stop competition problems caused by different national tax systems. The Neumark Report of 1962 concluded that the French model was the most effective. This led to two VAT directives in April 1967. These provided a blueprint for the entire European Economic Community. Following this, countries like Belgium, Italy, Luxembourg, the Netherlands, and West Germany introduced their own VAT systems.

VAT is very significant in the global economy today.

VAT Rates of Countries
VAT Rates of Countries

It raises about one-fifth of all total tax revenues worldwide. It is also a major revenue source for members of the OECD. As of January 2025, 175 of the 193 UN member countries use a VAT. This includes every OECD member except for the United States.

GDP per capita PPP vs VAT 2016
GDP per capita PPP vs VAT 2016

Because every transaction is reported to claim reimbursements, it creates a trail of information. This makes the tax difficult to evade compared to a standard sales tax.

While efficient, the system has notable complexities and criticisms. Some argue that VAT is a regressive tax. This means the poor might pay more as a percentage of their income because they spend more of what they earn. To help, some countries apply lower rates to products used by the poor. There is also the issue of compliance costs. In the UK, these costs are estimated at about 4% of the total yield. This can be a heavy burden for smaller businesses. Furthermore, delays in refunds from tax administrations can hurt a business's cash flow.

VAT1b2
VAT1b2

Despite these challenges, VAT remains a primary tool for modern government finance.

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🖼️ Images & Media (11)
File:Countries with VAT.svg
Countries with VAT.svg
File:Btw.png
Btw.png
File:VAT1b2.svg
VAT1b2.svg
File:VAT2b22.svg
VAT2b22.svg
File:VAT3b22.svg
VAT3b22.svg
File:Campaña nomasiva.com 049.jpg
Campaña nomasiva.com 049.jpg
US trade tariffs with major trading partners.webp
File:VAT Rates of Countries.svg
VAT Rates of Countries.svg
File:Vatratee.png
Vatratee.png
File:GDP per capita PPP vs VAT 2016.svg
GDP per capita PPP vs VAT 2016.svg
File:EEA VAT tax rates.svg
EEA VAT tax rates.svg
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