1. EU Taxation Unit 7 : Strategic aspects of VAT ESC Dijon- Pole Finance
Arvind Ashta
ESC Dijon- Pole Finance
The Notion of VAT
Comparison with Cascading Sales Tax
Competitiveness of VAT
Do VAT rates matter?
Zero rate versus Exemptions
Can VAT stimulate Employment?
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

2. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
The Notion of VAT
Notion of Value Added
Sales=1500, External Costs=1000
Value Added = 500 (wages, profits)
Tax on Value Added
20% tax = .2 * 500
Credit Method
The enterprise collects the tax from its customer
0.2 * 1500 = 300
Correspondingly, when the enterprise purchases, it pays VAT to its suppliers
0.2*1000 = 200
But deducts it when paying to the State
300 – 200 = 100
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

3. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
The nature of VAT
On Goods and Services
Indirect Tax
Proportional Tax
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

4. Cascading Sales Tax Compared with VAT
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

5. Cascading Sales Tax Compared with VAT
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

6. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Advantages of VAT
Exports are cheaper
No double taxation
Easier to enforce
Broader tax base
No preference to big business
Invisible
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

7. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Do VAT Rates Matter?
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

8. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Do VAT Rates Matter?
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

9. Zero rates versus Exemption
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

10. Zero rates versus Exemption
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

11. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
Case of Highway Tolls
Highways were exempt from VAT
 VAT was not recovered
 They therefore charged more
 This creates cascading effect
 Made EU goods uncompetitive
 Therefore exemption illegal
Exemption allowed to public authorities
 Creates distorsions
ESC-Dijon- Pole Finance – EU Tax – A. Ashta

12. ESC-Dijon- Pole Finance – EU Tax – A. Ashta
VAT and Employment
ESC-Dijon- Pole Finance – EU Tax – A. Ashta