Value-Added Tax or VAT, first introduced less than 50 years ago, remained confined to a handful of countries until the late 1960s. Today, however, most countries have a VAT, which raises, on average, about 25 percent of their tax revenue. 2 This chapter defines what is meant by a VAT; documents both the remarkable spread and the current reach of the tax; considers the differences between countries with and without the tax; and develops some stylized facts on the typical experience of countries that have adopted a VAT. What Is a VAT?Despite its name, the VAT is not generally intended to be a tax on value added as such: rather it is usually intended as a tax on consumption. Its essence is that it is charged at all stages of production, but with the provision of some mechanism enabling firms to offset the tax they have paid on their own purchases of goods and services against the tax they charge on their sales of goods and services.Although this characteristic feature is very clear-cut, the VATs observed in practice show considerable diversity as regards, among other things, the range of inputs for which tax offsetting is available and the range of economic activity to which the tax applies (that is, the base of the tax). Some major countries (such as China) currently do not grant credits for taxes on capital goods purchases; moreover, of those that allow credits in respect of such purchases, some do not refund excess credits (any excess of tax paid on inputs over tax chargeable on outputs). Most countries exclude exports from the VAT, in the sense that tax is not charged on sales for export but tax paid on inputs is recoverable, 1 1 The Nature, Importance, and Spread of the VAT 2The Nature, Importance, and Spread of the VAT 3 The Baltic countries, Russia, and other countries of the former Soviet Union. 4 Bangladesh affords an example of the former, Pakistan an example of the latter. 5 Malawi is a striking example. It was deemed by the Fiscal Affairs Department (FAD) of the IMF to have a VAT by 1994, though the tax did not extend to the retail stage. The adoption of a VATmeaning extension to the retail stage-was then part of IMF program conditionality in 1996. In addition, many countries choose to call by some other name-a general sales tax, or a goods and services tax-what is clearly a VAT. The label chosen is of no importance for this report.

The views expressed in this Working Paper arc those of the author(s) and do not m:ce:ssarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. WP/01l67Six Latin American countries have levied taxes on withdrawals from bank accounts, which have been viewed as a convenient tax handle during a difficult fiscal period. The paper reviews the arguments for and against this type of taxation, describes the taxes, and surveys their revenue performance and economic impact. It concludes that the recently implemented taxes have been successful in raising revenue in the short term, but that adverse allocational impacts have likely been significant. The tax may work better in times of fiscal crisis, when financial intermediation is deep, and when the tax rate is modest.

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