How was VAT invented: from France's 1954 reform to more than 170 countries
Value added tax, which today applies almost all over the world, appeared in France a little over seventy years ago. Its history in short key points and one calculation example.
Before VAT, many countries had turnover taxes: every time goods changed hands, tax was charged on the full price. As a result, "tax on tax" kept piling up. VAT was born as the answer to this problem.
- The author of the idea. Maurice Lauré, an official of the French tax administration, developed the system of taxing value added. He is often called the "father of VAT".
- The first step, 1954. France introduced value added tax (TVA) in April 1954. According to the sources, at first it applied mainly to large enterprises.
- The essence. At each stage the business deducts the tax on its purchases from the tax charged on its sales and pays only the difference. As a result, no tax on tax builds up.
- Spread across Europe. On 11 April 1967 the European Economic Community adopted the first and second VAT directives. Member states were to replace their turnover taxes with a common VAT system.
- Around the world. According to the OECD, VAT (called GST in some countries) is in force in 174 countries today.
- In Uzbekistan. The general VAT rate is 12%.
The 1980s, the 2000s and today: how has VAT calculation changed? The general direction; the exact years differ from country to country.
| Aspect | 1980s | 2000s | Today |
|---|---|---|---|
| Invoices | Paper, by hand or on a typewriter | Often prepared on a computer and printed on paper | Electronic in more and more countries, in some through a state platform |
| Checking input VAT | A register of paper invoices | A purchase ledger in software | In countries with an e-invoicing system, seller and buyer data are matched automatically |
| Return | A paper form | Electronic filing becomes widespread | Electronic filing is the norm; in some countries figures are pre-filled from invoices |
Example (prepared by the author, hypothetical figures). A loaf of bread goes through three stages: the farmer sells wheat for 100, the mill sells flour for 150 and the baker sells bread for 200. Suppose the turnover tax is 10% of the selling price at each stage. Then the total tax is 10 + 15 + 20 = 45, that is, 22.5% of the final price. If the same 10% is levied only on value added: 10 + 5 + 5 = 20, that is, exactly 10% of the final price. The longer the chain, the more turnover tax "piles up", whereas with VAT the burden does not depend on the length of the chain.
See also
Sources
- Annales des Mines: Maurice Lauré (1917–2001) · author of the idea of VAT, an official of the French tax administration
- Hérodote: 10 avril 1954 · the date TVA was introduced in France
- ICAEW: A brief history of VAT in Europe and the UK
- EUR-Lex: First Council Directive 67/227/EEC of 11 April 1967 · harmonisation of the legislation of member states concerning turnover taxes
- OECD: Consumption Tax Trends · VAT/GST has been introduced in 174 countries
- Example · prepared by the author, hypothetical figures