Abstract
Little has been written about the treatment of agriculture under the value added tax (VAT). This article attempts to fill the void by surveying and evaluating the situation in the Member States of the European Union (EU) and some other countries. Farmers are often exempted from VAT for administrative and political reasons. But this means that the VAT on their inputs cannot be ‘washed out’ through the tax deduction/credit mechanism. It then has to be borne by the farmers themselves or becomes an indeterminate and capricious element in consumer prices. To compensate farmers for the uncompensated VAT on inputs, the EU has devised a flat-rate scheme that permits them to charge a presumptive rate (approximately equal to the effective VAT rate on sector-wide inputs) on their sales to taxable agro-processing firms which, in turn, are permitted to take a deduction for this flat-rate addition from the VAT on their sales. Obviously, the flat-rate scheme is an arbitrary way of trying to achieve equal treatment between exempt and taxable farmers and between exempt farm products and other taxable goods and services. Full taxation, subject to the general threshold, appears to be the preferred choice.
Highlights
In the 1960s, when the value added tax (VAT) was introduced in the European Union, it was considered very difficult, for administrative and political reasons, to include farmers in the ambit of the VAT.1 Many farmers were small and held few if any accounts of their transactions, while their political clout was substantial
Farmers with a relatively high amount of VAT on inputs will be undercompensated, while farmers with a relatively low amount of VAT on inputs will be overcompensated, which appears at odds with basic notions about equal treatment as well as with the European Union (EU)’s competition policy
Undercompensated farmers can register and pay VAT, but this means that they incur compliance costs, which they have to balance against the extra relief
Summary
In the 1960s, when the value added tax (VAT) was introduced in the European Union, it was considered very difficult, for administrative and political reasons, to include farmers (agriculture) in the ambit of the VAT. Many farmers were small and held few if any accounts of their transactions, while their political clout was substantial. The European Union (EU) devised a unique flat-rate scheme that allowed farmers to apply a flat rate to their sales to taxable processing firms and add the amount to the invoice accompanying their supplies to processing firms This rate, set by the government, represented the effective VAT rate on total taxable inputs of the exempt agricultural sector.. This article surveys and evaluates the application of the VAT to the agricultural sector in the Member States of the EU and some other countries This is done by reference to the design principles of a best-practice VAT as developed in the tax literature and generally applied in countries such as Australia, Canada, New Zealand, Singapore and South Africa
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
