Value-added tax
A value-added tax, general consumption tax ) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared with, a sales tax. VAT is an indirect tax because individuals do not pay it directly to the government; instead, suppliers act as intermediaries by collecting the tax from customers at the point of sale and remitting it to the government. Specific goods and services are typically exempted in various jurisdictions.
Products exported to other countries are typically exempted from the tax, typically via a rebate to the exporter. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. VAT raises about a fifth of total tax revenues worldwide and among the members of the Organisation for Economic Co-operation and Development. As of January 2025, 175 of the 193 countries with UN membership employ a VAT, including all OECD members except the United States.
History
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 introduced VAT.
As of 2020, more than 160 countries collect 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. Buyers who themselves add value and resell the product pay VAT on their own sales. The difference between output tax and input tax is the amount paid to the government.
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.
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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, even if this may result in illegal tax evasion.By comparison, with VAT every transaction is reported to the government, 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.
On the contrary, if a seller accidentally charge sales tax to an intermediate buyer, the end price to the consumer will increase.
Business structure
VAT has no effect on how businesses organize, because the same amount of tax is collected regardless of how many times goods change hands before arriving at the ultimate consumer. By contrast, sales taxes, when collected on intermediate transactions in addition to final consumption, encourage businesses to vertically integrate to reduce the number of transactions and thereby reduce the amount of tax paid.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.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. Some countries compensate by implementing transfer payments targeted to 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 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. The assertion that this "border adjustment" would be compatible with the rules of the WTO is controversial; it was alleged that the proposed tax would favour domestically produced goods as they would be taxed less than imports, to a degree varying across sectors. For example, the wage component of the cost of domestically produced goods would not be taxed.
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. VAT is purchased quarterly. An exception occurs for taxpayers who state monthly payments. VAT is disbursed to the state's budget on the 20th day of the month after the tax period. The law took effect on January 1, 2022.
Australia
The goods and services tax 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 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.The National Board of Revenue administers VAT. Other rules and acts include Development Surcharge and Levy Act, 2015; 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 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 is a national sales tax introduced in 1991 at a rate of 7%, later reduced to 5%. A Harmonized Sales Tax that combines the GST and provincial sales tax, is collected in New Brunswick, Newfoundland, Nova Scotia, Ontario and Prince Edward Island, 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, which are collected in British Columbia, Manitoba and Saskatchewan. 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, jewellery, pyrotechnic items or soft drinks with high sugar. 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 of the [People's Republic of China|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. In 1994, VAT became universally imposed on production, wholesale, retain, and importation of all goods.
In 2016, business tax was replaced with VAT nationwide. VAT's significance to China's tax revenues increased drastically after this.
Czech Republic
In 1993, a standard rate of 23% and a reduced rate of 5% for non-alcoholic beverages, sewerage, heat, and public transport was introduced. In 2015, rates were revised to 21% for the standard rate, and 15% and 10% reduced rates. The lowest reduced rate primarily targeted baby food, medicines, vaccines, books, and music shops, while maintaining a similar redistribution of goods and services for the other rates.In 2024, a law aimed at reducing the national debt featured return to two rates: a standard rate of 21% and a reduced rate of 12%. Goods and services were redistributed among different tax rates.
There was only one services that shifted from the standard rate to the reduced rate and that were non-regular land passenger bus services. These are not taxi services, which apply a VAT rate of 21%. Books and printed materials, including electronic books, were zero rated.
Several services were moved from reduced rates to the standard rate. Examples include hairdressers and barbers, bicycle repairs, footwear and clothing repairs, freelance journalists and models, cleaning services, and municipal waste.
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. Certain goods and services must be exempt from VAT, and certain other items are exempt from VAT by default, but states may opt to charge VAT on them. 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 on 1 January 2018 implemented VAT. For companies whose annual revenues exceed $102,000, 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.The standard rate is 10%. Food, beverages, newspaper subscriptions with certain criteria and other necessities qualify for a rate of 8%. Transactions including land sales or lease, securities sales and the provision of public services are exempt.
Malaysia
Mexico
The existing sales tax was replaced by VAT on 1 January 1980. As of 2010, the general VAT rate was 16%. This rate was applied all over Mexico except for border regions, 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, or meirverdiavgift , , , or Finnish: arvonlisävero are the Nordic terms for VAT. Like other countries' sales and VAT, it is an indirect tax.| Year | Tax level | Name |
| 1962 | 9% | OMS |
| 1967 | 10% | MOMS |
| 1968 | 12.5658% | MOMS |
| 1970 | 15% | MOMS |
| 1977 | 18% | MOMS |
| 1978 | 20.25% | MOMS |
| 1980 | 22% | MOMS |
| 1992 | 25% | MOMS |
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, 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, newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption, 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 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 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, 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 Romania is a consumption tax charged at a standard rate of 21%. A single reduced rate of 11% applies to most foodstuffs and utilities.Russia
The VAT rate is 20% with exemptions for some services. VAT payers include organizations, 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 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. The current standard rate for VAT in the United Kingdom since 2011 is 20%. Some goods and services have a reduced rate of 5% or are zero-rated. 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" from 1975 until voter-initiated legislation repealed it, replaced by the Michigan Business Tax in 2008.
Hawaii has a 4% General Excise Tax 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 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 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
Examples by continent
European Union countries
| Country | Standard rate | Reduced rate | Abbreviation | Local name |
 AustriaNon-European Union countriesVAT-free countries and territoriesAs of January 2022, the countries and territories listed remained VAT-free.
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Akrotiri and Dhekelia