The Evolution Of VAT

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The origin of value added tax (VAT) can be traced to the German business man Wilhelm Von Siemens in 1918, he is credited with coming up with the idea of a VAT, for this he is also called father of VAT (Ebrill et.al, 2001). Von siemen’s VAT concept was seen as a technical innovation that brought a key improvement to the turn over tax (Thomas, 1921). However, the current popularity of VAT owes much to Maurice Laure and Carl Shoup. The recent evolution of VAT can be considered as the most important fiscal innovation of the present century. The VAT was first introduced at a national level in France in 1954.France became the first European country to implement VAT on an extensive scale. Initially it was not a complete system of VAT, since it was…show more content…
Over 143 countries now levy VAT and it is estimated that VAT currently accounts for over 20% of the world‘s tax revenue (Value-Added Tax Middle East).The VAT is designed to raise large amounts of revenue (typically 5 to 10 % of gross domestic product) without creating economic distortion. In practice, many countries, because of political pressures to use the tax system to correct social inequalities and because of their inability to tax certain sectors use exemptions and multiple rates that erode the neutrality of the VAT. Such complications make the VAT more complex and extensive to administer and increase the opportunities for evasion (Tait,…show more content…
Many thinkers believe that VAT spread globally because it is the consumption tax best suited to the revenue needs of states in an increasingly globalised economy. Even those who recognize the role of key regional and international institutions in promoting VAT often attribute the motives behind the promotion to the merit of the policy instrument itself. The rise of popularity of VAT is attributed to such virtue as the tax being the best method taxing general consumption, its neural treatment of exports, and its revenue raising capacity (Consumption Tax Trends, 2008). VAT are especially well designed to avoid taxing business input, since each component of a retail product’s value added is taxed exactly once. In other worlds, many countries replaced their poorly structured sales taxes with a better-functioning salestax.Some experts are of the view that the rationale for adopting a VAT was quite different; the VAT was adopted to replace the corporate income tax not the sales tax. Corporate income tax tends to fluctuate wildly over the business cycle because they are based on corporate profits, which vary dramatically during the periods of economic growth and downturns. Michigan’s corporate tax was especially volatile due to the importance of auto sales to its economy.A VAT is an inherently more stable and predictable revenue source than a corporate profits tax, because the tax base is a
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