Financial Services

As shown in Chapter 13, the appropriate treatment of financial services is the single most important design issue that remains to be solved under the VAT. Conventional wisdom holds that margin-based financial services, as opposed to fee-based services, cannot be included in the VAT base calculated on the tax credit method. For this reason, most countries with a VAT exempt financial services entirely, whether margin-based or fee-based. To limit the effects of the rather broad EU type of exemption, two kinds of modifications have been adopted. First, the reach of the full exemption has been narrowed down by taxing fee-based financial services. Second, the cascading effects of the exemption have been mitigated by zero-rating the provision of financial services to registered businesses, providing for partial input VAT recovery. The chapter concludes by drawing some lessons from the analysis which may be useful for African countries.