## Value-Added Tax Continues to Expand ## Source details **Canonical URL:** [Value-Added Tax Continues to Expand](https://www.imf.org/en/publications/fandd/issues/2022/03/b2b-value-added-tax-continues-to-expand) ## Other formats - [Markdown version](/en/publications/fandd/issues/2022/03/b2b-value-added-tax-continues-to-expand/index.md) - [Structured JSON version](/en/publications/fandd/issues/2022/03/b2b-value-added-tax-continues-to-expand/index.json) - [Bundle manifest](/en/publications/fandd/issues/2022/03/b2b-value-added-tax-continues-to-expand/bundle-manifest.json) ## Bibliographic details - Authors: Ruud de Mooij, ARTUR SWISTAK - Published: March 1, 2022 --- ### Overview - More countries are adopting the VAT, and its contribution to global revenue is rising. - Publication: F&D Magazine, March 2022. - Authors: RUUD DE MOOIJ, ARTUR SWISTAK. - Opinions expressed are those of the authors; they do not necessarily reflect IMF policy. ### How VAT Works - VAT applies to transactions across the supply chain, not only sales to final consumers, and uses a crediting mechanism to avoid cascading taxes. - Example with a 20 percent VAT: - Retail sale price inclusive of VAT: $1.50. - Price net of VAT: $1.25. - VAT charged by the grocery store: $0.25 (20 percent of $1.25). - Store purchase net price from factory: $1.00. - Store pays factory: $1.20, including $0.20 VAT. - Store credits $0.20 input VAT against collected VAT and remits $0.05 to the tax authority. - The state ultimately receives $0.25 from the yogurt sale, collected sequentially along the supply chain. - VAT is imposed on a destination basis: imports included in the VAT base; exports excluded by applying a zero rate on exports. - The credit-invoice mechanism creates a need for tax administrations to provide refunds, especially to exporting businesses with significant input tax credits; nonpayment can create cash flow problems and deter investment. - VAT fosters voluntary compliance because businesses have an incentive to obtain invoices to claim input VAT credits. ### Ideal and Real VATs - Textbook (ideal) VAT characteristics: - Broad base comprising all final consumption. - Single rate of tax, usually between 15 and 20 percent. - Minimizes incentives to shift consumption across goods and services. - Limitations of VAT for other objectives: - Exempting food to support poor households can cost significant revenue because richer households also consume food. - Better instruments for redistribution: progressive income taxes and cash transfers. - Behavior regulation (e.g., drinking, smoking, polluting) better served by dedicated excises. - Common deviations from ideal VAT: - Reduced rates, exemptions, and special programs are widespread. - Minimum registration thresholds based on turnover are used to exempt micro businesses to simplify administration. - Exemptions and reduced rates undermine revenue objectives directly and indirectly by increasing collection costs and facilitating fraud. - Reforms eliminating VAT concessions often meet fierce resistance from powerful lobby groups. ### Emerging Challenges and the Next VAT - Responses to cross-border e-commerce and digital services: - Simplified VAT registration for nonresident vendors. - Online platforms acting as VAT collectors for digital services. - Potential future developments: - Blockchain and digital money could provide tax administrations with information about transactions along the full supply chain, potentially removing the need for multistage VATs. - If transaction data can be linked to individuals, consumption taxes could be personalized and compete with personal income tax as an efficient redistributive instrument. - Overall assessment: - VAT has withstood globalization, and its revenue share has risen in recent decades. ### Key statistics and recent adopters / planned introductions - More than 160 countries impose VAT. - VAT raises, on average, over 30 percent of their total tax take. - As a share of GDP, VAT brings in between 4 percent in low-income developing countries and more than 7 percent in advanced economies. - Recent adopters include: Angola, Bahrain, Bangladesh, Oman, Saudi Arabia, Suriname, and the United Arab Emirates. - Planning to introduce VAT: Bhutan, Kuwait, Liberia, Qatar, and Timor-Leste. ### Policy recommendations and implications - Preserve a broad VAT base and avoid multiple rates and exemptions to maximize revenue and minimize distortions. - Use progressive income taxes and cash transfers to support poor households rather than VAT exemptions on basic goods. - Use dedicated excises to target behavioral regulation (alcohol, tobacco, emissions) rather than differentiated VAT rates. - Improve tax administration capacity to manage refunds, especially for exporters, to avoid cash flow problems and investment deterrence. - Leverage digital technologies and platform-based collection to address cross-border e-commerce and digital services taxation. - Consider future opportunities from blockchain and digital money for more comprehensive transaction information and potential redesigns of consumption taxation. *Value-Added Tax Continues to Expand, F&D Magazine, March 2022. RUUD DE MOOIJ; ARTUR SWISTAK.* --- ## Content in this bundle - **عودة إلى الأسس** - [عودة إلى الأسس (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ar/basics.pdf.md){rel="alternate" type="text/markdown"} - [عودة إلى الأسس (PDF)](/-/media/files/publications/fandd/article/2022/march/ar/basics.pdf){rel="external" type="application/pdf"} - **Back to Basics** - [Back to Basics (Markdown version)](/-/media/files/publications/fandd/article/2022/march/back-to-basics.pdf.md){rel="alternate" type="text/markdown"} - [Back to Basics (PDF)](/-/media/files/publications/fandd/article/2022/march/back-to-basics.pdf){rel="external" type="application/pdf"} - **La taxe sur la valeur ajoutée continue à se développer** - [La taxe sur la valeur ajoutée continue à se développer (Markdown version)](/-/media/files/publications/fandd/article/2022/march/fr/basics.pdf.md){rel="alternate" type="text/markdown"} - [La taxe sur la valeur ajoutée continue à se développer (PDF)](/-/media/files/publications/fandd/article/2022/march/fr/basics.pdf){rel="external" type="application/pdf"} - **basics** - [basics (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ru/basics.pdf.md){rel="alternate" type="text/markdown"} - [basics (PDF)](/-/media/files/publications/fandd/article/2022/march/ru/basics.pdf){rel="external" type="application/pdf"} - **El impuesto al valor agregado continúa su expansión ● Finanzas y Desarrollo ● Marzo de 2022** - [El impuesto al valor agregado continúa su expansión ● Finanzas y Desarrollo ● Marzo de 2022 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/sp/basics.pdf.md){rel="alternate" type="text/markdown"} - [El impuesto al valor agregado continúa su expansión ● Finanzas y Desarrollo ● Marzo de 2022 (PDF)](/-/media/files/publications/fandd/article/2022/march/sp/basics.pdf){rel="external" type="application/pdf"} - **增值税被不断推广** - [增值税被不断推广 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/zh/basics.pdf.md){rel="alternate" type="text/markdown"} - [增值税被不断推广 (PDF)](/-/media/files/publications/fandd/article/2022/march/zh/basics.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2022/03/b2b-value-added-tax-continues-to-expand_