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.