VATs in Federations and Common Markets

The most striking tax development of the last half century has been the worldwide rise of the VAT. Most countries now have national VATs. In addition, several large federal countries – Brazil, Canada, and India – also have regional (state or provincial) VATs that, like national VATs, are general consumption taxes administered in principle through a transaction-based credit-invoice approach. Although these three countries are very different, and each established such a tax for its own reasons, in different ways, and with varying degrees of success, on the whole these regional VATs appear to work. While the taxes in Brazil and India are by no means perfect, they appear to be less economically distorting than the taxes they replaced – gross receipts taxes in Brazil and pre-retail stage sales taxes in India – while being little or no more difficult to administer. The experience with better designed and administered regional VATs in Canada shows clearly that dual VATs can work well in a federal country. Canadian experience may offer some useful lessons for VATs in common markets like the European Union (EU).