What is VAT?

Abstract

Chapter 2 dwells briefly on the workings and the legal and economic nature of the VAT, and enumerates the characteristics of a best-practice VAT against which existing regimes are evaluated. A best-practice VAT includes all goods and services in its base, unless specifically exempted on administrative grounds, and covers all stages of production and distribution, including the retail stage. It is levied at a single, uniform rate and eliminates cascading or cumulative tax effects by granting taxable firms a full and immediate tax credit or deduction for the tax paid in respect of purchases from other taxable firms. Furthermore, the VAT is destination-based by zero-rating exports and taxing imports. A best-practice VAT limits administrative and taxpayer discretion to a minimum and is based on self-assessment. The tax administration’s task should be confined mainly to providing taxpayer education, monitoring late filers and late payers, and, particularly, auditing taxable persons’ accounts.