HISTORICAL BACKGROUND OF VAT

large number of countries. This tax was proposed for the first time by Dr. Wilhelm Von

Siemens for Germany in 1919 as an improved turnover tax. In 1921, VAT was suggested

by Professor Thomas S. Adams for the United States of America who recommended

"sales-tax with a credit or refund for taxes paid by the producer or dealer (as purchaser)

on goods bought for resale or for necessary use in the production of goods for sales."

VAT was also recommended by the Shoup Mission for the reconstruction of the Japanese

Economy in 1949. However, the tax was not introduced by any country till 1953. France

led the way in 1954 by adopting a VAT that covered the industrial sector alone and the tax

was limited up to the wholesale level. The tax was limited to the boundaries of France

until the fifties.

VAT has, however, been spreading rapidly since the sixties. The Ivory Coast followed

France by adopting VAT in 1960. The tax was introduced by Senegal in 1961 and by

Brazil and Denmark in 1967. The tax has gathered further momentum as it was made a

standard form of sales-tax required for the countries of the European Union (then

European Economic Community). In 1968, France extended VAT to the retail level while

the Federal Republic of Germany introduced it in its tax system. The Netherlands and

Sweden imposed this tax in 1969 while Luxembourg adopted it in 1970, Belgium in 1971,

Ireland in 1972, and Italy, the United Kingdom, and Austria in 1973. Of the other members

of the European Union, Portugal and Spain introduced VAT in 1986, Greece in 1987, while

this tax was adopted by Finland in 1994. Many other European countries have adopted

VAT. Similarly, many countries in the North and South America, Africa and Oceania have

introduced VAT.

VAT has been spreading in the Asian region as well. The Republic of Vietnam adopted

VAT briefly in 1973. (VAT was abolished soon but it was reintroduced in 1999 in Vietnam.)

South Korea introduced VAT in 1977, China in 1984, Indonesia in 1985, Taiwan in 1986,

Philippines in 1988, Japan in 1989, Thailand in 1992, and Singapore in 1994 while

Mongolia has been implementing this tax since 1998.

In the South Asian Association for Regional Cooperation (SMRC) region, VAT has been

considered in great depth in India. In 1986, India introduced VAT in a different way under

the name of Modified Value Added Tax (MODVAT). Unlike the VAT system of other

countries, the Indian MODVAT system was designed to cover manufacturing of goods by

giving credit of excise duty paid on inputs. The scope of MODVAT has been extended

over the years and has since been renamed as Central Value Added Tax (CENVAT),

which covers services also.

Pakistan adopted VAT in 1990, Bangladesh in 1991, and Nepal in 1997 while Sri Lanka

introduced VAT in 1998.

As VAT is less distortive and more revenue-productive, it has been spreading all over the

world. As on today, about 130 countries have adopted the same.