As the VAT is collected at different stages, it makes under-valuation and smuggling less attractive and more difficult, which helps generate more revenue not only from VAT but also from other taxes, including import duties, excises and income tax. The implementation of the VAT in the developing world helps establish an accounts-based tax system that ensures transparency
Value added tax (VAT) is the most important innovation in the field of taxation in the 20th century.
Its concept was first introduced in 1918, its detailed design was prepared in 1949 and the tax was actually adopted in practice for the first time in 1954.
VAT is considered as the reformed version of the general sales tax. It was made a common tax for the European Economic Community in the1960s. VAT has now been adopted by about 180 countries around the globe.
Nepal introduced VAT on November 16, 1997, exactly 24 years ago. In the beginning, this day used to be celebrated as VAT's birthday, but since 2012,it has been observed as National Tax Day. On this day, the highest taxpayers in different areas or most compliant taxpayers are honored by the government.
This articles briefly throws light on the contribution of three VAT heroes who were instrumental in inventing, designing and implementing the VAT – a tax that has been proven to be the most successful in mobilising domestic revenue in an efficient and neutral way. German businessman Wilhelm von Siemens was the inventor of VAT.
Born in 1855 in Germany, Siemens proposed the idea of VAT to the German government in 1918. As an industrialist, he was worried about the harmful impact created by the multiple stage sales tax, which was introduced by the German government as a temporary measure to solve the financial problems generated by World War I.
While the sales tax proved highly successful in generating revenue, it created many unintended and undesirable impacts on the German economy. As the tax was collected at each stage in the production and distribution process, there was a situation where tax was levied on tax, resulting in a cascading tax effect.
The tax also encouraged vertical integration of businesses, where, to avoid or minimise tax payment, businesses started producing inputs of their products themselves instead of buying them from a specialised industry. As a result, the German economy was deprived of the advantages of economy of scale and specialisation. On the other hand, as the tax proved to be highly revenue productive, the German government did not abolish this tax even after the end of the War.
As a responsible businessman from the Siemens industrialist family, the inventor, instead of simply recommending the abolition of the distortive multiple stage sales tax, proposed replacing it by an efficient and neutral tax called VAT. As VAT is levied only on the value added at different stages, it neither encourages the businesses to integrate vertically nor leads to tax cascading and pyramiding. Being a new concept, however, the German government decided not to adopt the new tax but to reduce the rate of multiple stage sales tax.
American economist and public finance expert Professor Carl S. Shoup is known as the detailed designer of the modern VAT system. Born in 1902 in the US 16 years before the invention of the VAT in Germany, Shoup designed a comprehensive VAT system for Japan in 1949 to help it recover from the war when he was chairman of tax mission to Japan, popularly known as the Shoup Mission.
In 1949, the mission recommended the VAT in place of the existing enterprise tax. The VAT, however, was subjected to bitter criticism from various groups in Japan that did not care to consider its basic principles.
There was general confusion about the potential benefits of the tax. So the introduction of the tax was postponed several times, and finally, in 1954, Japan decided not to introduce it.
French bureaucrat Maurice Lauré is known as the implementer of VAT. Born in 1917 in France, he was originally an engineer by profession. But he joined the French tax inspectorate after World War II and became joint director of the new tax authority in 1952.
He was instrumental in introducing VAT for the first time in France on April 10, 1954 and has since been the source of inspiration for reform- minded tax administrators all over the world.
In conclusion, VAT is the most important innovation in the field of taxation in modern times. It is considered as the most revenue productive and buoyant tax in many countries and generates about 6 per cent of GDP even in many developing countries.
It is an economically efficient tax. Since it allows taxpayers to claim an input tax credit, there is no tax levied on tax. This means that the VAT can be applied anywhere in the economy without leading to a cascading effect. Further, as exports are zero-rated under the VAT system, exporters do not have to pay any tax on their exports. Yet, they are entitled to claim VAT paid on the inputs of exports.
Since VAT brings economic activities in both the import/manufacturing and distribution process into the tax net, its base is broader than many other types of indirect taxes and is responsive to economic activities and is revenue productive. Even in the developing countries, where the current tax base is relatively low due to the nature of their economies, VAT improves with the situation over time; as businesses get bigger, they fall under the VAT net.
Furthermore, as the VAT is collected at different stages, it makes under-valuation and smuggling less attractive and more difficult, which helps generate more revenue not only from VAT but also from other taxes, including import duties, excises and income tax. The implementation of the VAT in the developing world helps establish an accounts-based tax system that ensures transparency, which is good for the development of the modern private sector.
There is no dispute about the importance of VAT among academicians, the business community and bureaucrats, and all remember the contribution of Siemens, Shoup and Lauré in generating the much-needed revenue for the overall development of their countries, carry out extensive social security and economic welfare programmes and pull millions of poor out of poverty.
A version of this article appears in the print on November 17, 2021, of The Himalayan Times.