Why do not all countries introduce a VAT/GST?

Updated on July 20, 2022

A professor of tax law at Orebro University, Eleonor Kristoffersson also serves as a visiting lecturer at Gävle and Linköping universities in Sweden.

There was no such thing as a Value Added Tax until the 1950s (VAT). In nations with VAT, commonly known as the goods and services tax, more than 70% of the world’s population now lives (GST). The spread of VAT throughout the world is discussed in this blog. In other nations,

VAT isn’t imposed at all. Examples include Syria and the United States of America (the US). Is there a reason why not every country has a VAT in place?

The origin and the spread of VAT

VAT’s genesis is a subject of some debate. Wilhelm von Siemens, a German industrialist, is credited with proposing VAT in 1919. Others claim it was created about the same time by economist Thomas Sewall Adams. However, the VAT was not designed and implemented directly by the legislative body but rather originated as a model for general consumption taxation.

The Michigan Business Activity Tax was in place from 1953 to 1967. (BAT). On the basis of modified receipts or income, the BAT was applied. Taxpayers were permitted to deduct a wide range of company expenses from their taxable gross income, including the most common and routine costs. To be included in this category were all taxes other than income tax and those relating to the cost of products supplied.

In the early 1950s, France was the first country to enact VAT as we know it today. The French manufacturing tax was transformed into the VAT in France. Initially, there were two separate taxes in the system. It was the final producer who was responsible for paying a production tax

based on the selling price of the product. All manufacturers were subject to the second charge, which was a sales tax. In 1954, a complete VAT with full deduction for input VAT on capital goods was adopted as a consequence of a tax reform bill.

The French VAT system was implemented in Ivory Coast and Senegal in 1960 and 1961, respectively. In 1967, the year of the first EEC VAT Directives, Denmark and Brazil both began collecting VAT from their citizens. VAT had spread to Latin America and sub-Saharan Africa by the late 1970s and early 1980s. The International Monetary Fund and the World Bank urged many Latin American governments to strengthen

their fiscal capability by instituting VAT. As part of their preparations to join the European Community, the Republic of Korea established VAT in 1977, New Zealand GST in 1985, and Turkey, Spain, and Portugal EEC-based VAT systems in 1985-87. (EC). Taxation without representation (VAT) was first implemented in Japan in 1989, then in Canada and South Africa, then in China, Australia, and India. Qatar and Oman are set to implement VAT in 2021, whereas Saudi Arabia imposed VAT in 2018, the United Arab Emirates in 2018, and Bahrain in 2019.

The great majority of countries in the globe now charge VAT on goods and services. Currently, 169 of the 193 nations that are full UN members have implemented a value-added tax. There are no VAT in the US, the sole large economy.

Why do not all countries introduce VAT?

Because VAT has spread over the world, there are a variety of reasons. Several countries have enacted VAT as a means of raising money, while others have done so in substitution of problematic sales taxes. Historical institutionalism, or the idea that past decisions influence current ones, is another possible explanation. If you want a deeper understanding of the emergence of VAT, Kathrin James recommends drawing on financial, policy and legal analyses in her latest research in “The Rise of the Value-Added Tax.” There hasn’t been enough investigation into why VAT has grown so widely.

It’s also worth considering why certain countries have chosen not to establish a VAT when trying to figure out why VAT has expanded so far. As examples, Syria and the United States are cited here.

As a prelude to the introduction of VAT, Syria implemented a consumption tax act in 2015 (Law Decree 2015/11). However, because the tax’s consumption base is so small, the tax cannot be classified as a broad-based tax on consumption. Services related to tourism and entertainment (like nightclubs, hotel accommodations, and amusement parks) as well as imported goods, automobiles, alcoholic beverages, and tobacco products, as well as some high-end cosmetics and jewelry, as well as concrete and some domestic appliances (like washing machines and dishwashers), are all subject to taxation.

Other than the current civil war, why hasn’t VAT been implemented in Syria? Literature and seminars have been devoted to the subject matter. One of the reasons given is that taxpayers’ tax awareness needs to be raised in order for them to abide by the law. As of now, the shadow economy is rather large. It’s also possible that the country’s high inflation rate is to blame. Prices are already out of reach for most people’s budgets. When costs are already high, imposing a VAT on top of them may be tough for consumers to bear. A modern VAT also necessitates a tax administration capable of managing large amounts of data. Thus, implementing VAT in the current state is difficult. There are numerous historical examples of general consumption taxes being implemented to aid in the recovery of a country following a war. Since Syria’s neighbors have either implemented or are preparing to implement VAT, and the government will need to raise funds to rebuild, it seems likely that Syria will follow suit.

The introduction of VAT in the United States appears to be less likely than in the rest of the world. There is a lengthy history of state-level sales and use taxes in the United States. Federal VAT measures have been floated. The establishment of a federal VAT in the United States is more complicated than taxing a previously untaxed tax base because of the widespread taxation of consumption. The federal government would gain tax money through a federal VAT, while the states would lose tax revenue as a result. In addition, one of the most frequently heard arguments is that a VAT would be unfair to low-income households. In the event that all of the countries around the world follow the destination principle and the US does not, there is a possibility that cross-border trade competitiveness will be affected.

To sum up, these two cases show that the reasons for not introducing VAT are vastly different. Having a large tax base and limited exemptions gives the VAT an advantage in that it can be revenue neutral for enterprises that are subject to it. One drawback of VAT is that it is taxed at every stage of the supply chain, making it difficult for firms to keep track of. However, the administrative constraints faced by firms may reduce as tax reporting and administration become more automated.

Taxes other than VAT have been discussed in certain nations, such as the Philippines and Russia. VAT, on the other hand, is on the rise around the world. No one can tell if the spread of value-added tax (VAT) will slow down or come to a halt, or if there are more effective ways to tax consumption in today’s digital environment than using VAT.

Acknowledgments are made in this section. Value added tax’s legal background can be seen in the Interfax 2021 article “Value Added Tax as a Legal Transplant.” TOR/Skattenytt grantee Mohammad Konobs of the University of rebro conducted research for the section on Syrian law.