How do countries handle VAT exemptions worldwide?

The government is considering withdrawing most VAT exemptions while retaining benefits for lower-income groups, a move that has raised questions about how such policies are managed globally.

Experiences from other countries show that while VAT is widely used, exemptions and reduced rates remain common to address equity concerns.

What is the global experience?

Although VAT is often seen as a regressive tax, it is widely applied across the world. According to Tax Foundation Europe, more than 170 countries impose VAT on goods and services, including all major European economies.

In the European Union, VAT rates generally range from 15% to 27%, compared with Bangladesh's standard rate of 15%. In 2022, VAT accounted for 55% of the EU's total taxes on production and imports.

Tax collection levels vary significantly. In the same year, taxes and social contributions as a share of GDP were highest in France (48.0%), Belgium (45.6%) and Austria (43.6%).

To reduce inequality and economic distortions, many countries apply reduced VAT rates or exemptions on essential goods and services. These often include food, healthcare, education and public transport, as lower-income households typically spend a larger portion of their income on such items.

Reduced rates are also used to encourage consumption of specific goods, such as books, as well as to support sectors like tourism and clean energy.

Across Africa, Asia and Latin America, VAT exemptions commonly apply to basic food, medicine, healthcare and education to ease the burden on poorer populations.

However, these exemptions are not always precisely targeted. Since wealthier groups also consume many of these goods and services, they benefit as well.

A 2021 report by TaxDev noted that both low- and middle-income countries and high-income nations maintain reduced VAT rates and exemptions, largely driven by concerns about income distribution and the need to protect lower-income households.