Value Added Tax (VAT) is an indirect consumption tax present in modern tax systems, which taxes the added value created in the process of producing and consuming a good. Essentially, this tax is calculated on the value added at each stage of the production process, with VAT paid at each step being deductible from the VAT to be paid in subsequent stages. VAT is a tax ultimately passed on to the consumer, who bears the final payment responsibility. However, it is collected through businesses at the production and distribution stages and transferred to the government’s treasury.
The main feature of VAT is that while the tax payment responsibility lies with the taxpayer at each transaction, the tax burden ultimately falls on the final consumer. Businesses involved in intermediate stages, such as producers, wholesalers, and retailers, collect VAT on every transaction but can also use the VAT paid in previous transactions as a credit. This mechanism allows VAT to be "spread out" and collected progressively, which results in the tax burden being distributed across a broader economic base.
Structure and Scope of VAT
VAT can be applied at virtually every stage of economic activities. Transactions subject to VAT include commercial, industrial, agricultural, and freelance professional activities, as well as imports and domestic service activities. VAT is calculated on the value added during the entire processes of production, trade, and service provision. VAT is collected by businesses at every stage, from the production to the sale of the good, and the value at each stage is subject to tax.
At each stage, the VAT paid is offset by the VAT paid in previous stages, resulting in the tax being applied only to the added value at each step. For example, a producer can deduct the VAT paid on raw materials from the VAT collected on the final product’s sale. As such, businesses at each stage do not bear the tax burden, as they can deduct the VAT they have paid. The final consumer pays the VAT added to the final sale price of the product, ensuring that the VAT ultimately reaches the end user.
Economic and Social Aspects of VAT
One of the main advantages of VAT is its potential to prevent tax evasion. Since tax is collected at each stage and the VAT paid at previous stages can be shown as a deduction, it increases transparency. This system forces businesses to pay taxes and also ensures that the tax base is recorded at each transaction, which helps combat the informal economy. Additionally, a robust document and record system is required for VAT to be effectively applied, making the tax collection process more reliable and transparent.
However, there are criticisms that VAT can lead to inequality in society. Since VAT is levied at the same rate on all consumers regardless of income level, it can place a heavier burden on low-income consumers. To balance VAT’s inequity, reduced tax rates are often applied to low-income products or exemptions are granted for certain sectors.
Export Exemption and VAT Application in Turkey
In Turkey, VAT came into effect in 1985, and exemptions for export transactions were introduced to facilitate trade with imports. This provision ensures that VAT is not applied to goods sold abroad, which helps enhance Turkey’s competitiveness in global markets. With these exemptions, exporters can recover VAT paid in the domestic market, a key factor in boosting Turkey’s exports.
VAT is one of the most common and developed forms of consumption tax in the modern world and is applied in many countries globally. Many developed countries, including European Union member states, use VAT to increase tax revenues and ensure economic transparency. Turkey's VAT system has been harmonized with the European Union, and it serves as an effective mechanism for tax collection.
