Better VAT for Both Explicit and Implicit Financial Fees

Abstract Recently, several countries have initiated reforms on their VAT regimes to include financial services, following the emergence of various methods for taxing both implicit and explicit fees. This article provides a theoretical and empirical analysis of these reforms. While exempting financial services from VAT, or taxing only Explicit Fees and Commissions (EFCs), tends to generate excessive income and private consumption, the comprehensive taxation of both implicit and explicit fees within Financial and Insurance Services (FIS) leads to more sustainable outcomes. Specifically, this approach enhances the price visibility of public services, thereby fostering a reduction in public expenditure.