Background to the introduction of Value Added Tax in Malta

Abstract

The Value Added tax evolved through successive attempts to reduce the inequities of the cascade turnover tax which was actually the sales tax commonly used by the countries now forming the EU. There has been an evolution of the French VAT side by side with the development of the German sales taxes and the British purchase tax. The idea of charging tax on turnover is often credited to Wilhelm von Siemens who first proposed a tax for Germany in 1919 under the name of an "ennobled turnover tax". In the early 20's both France and Germany had general taxes on firms' turnover. In the years 1926 to 1936 the cascade tax and the single-stage purchase tax ran together. By 1936 the old cascade transaction tax became undesirable and both it and the newer single-stage purchase tax were both replaced by a new single-stage production tax. A major change took place in 1948 when a system of fractional payments was introduced, thus forming the unique contribution of the VAT. The final step in the evolution of VAT allowed the tax content of capital goods to be offset against total tax liability. The evolution of turnover tax eventually led to the present VAT by the introduction in France of the TV A or "taxe sur la valeur ajoutée" in 1953. The establishment of the EU in 1957 brought about more awareness since the Member States at that time were instructed to harmonise tax on turnover and indirect taxes. Several studies were made to find the most suitable solution. By 1971 all EU countries except Italy had introduced VAT. [...]