Making VAT as Neutral as Possible

EC tax review 2012–5 - Prof. H. Kogels

Since the 1960s, Value Added Tax (VAT, sometimes referred to as ‘GST’ or Goods and Services Tax) has grown into the most preferred and most robust broad based consumption tax in more than 150  countries worldwide (including all OECD Countries, with the exception of the USA) accounting on average for about 20% of the total tax revenue.1 The leading principle of VAT is neutrality. Being collected by businesses at each stage of the production and distribution chain, businesses are charged VAT on the inputs they buy to produce further goods or services, but can deduct (or recover) that input-VAT from the output-VAT they charge on the price of the good or service they sell to the next supplier. Eventually the total tax collected throughout the chain should correspond to the VAT paid
by the final consumer. The final consumer bears the VAT at the rate applicable, irrespective of the number of transactions in the production and distribution chain (internal neutrality). Moreover, VAT taxes importation and zero-rate exports, thus not affecting international trade (‘external neutrality’ or ‘destination principle’).