VAT was introduced in Norway under the name “temporarily sales tax for emergency” in 1935. After almost 80-years VAT is still with us, and is today the third largest provider to the total tax revenue behind tax on ordinary income from personal taxpayers and petroleum tax. When first introduced it was a cumulative tax of 1% pr. transaction, it has increased steadily from 1% and up to a present general rate of 25%. Vat is a popular form of tax among politicians due to the fact that it is the most cost effective tax to collect and the amount of revenue it creates.
A tax rate of 25% affects customer behaviour and consumption. As long as the rate is flat it will not lead to any distortion of the market or changes in purchase decisions. Today there is three different VAT rates plus the exemptions. The general rate of 25%, a 15% rate on goods intended for human consumption and 8% on a wide variety of services including personal transport services and letting of hotel rooms. Cars for private use are taxed with the general rate of 25%.
In the pursuit for a more environmentally friendly car fleet, the politicians are using a combination of economic and practical incentives. In 2001 politicians agreed upon exempting electrical cars from the normal VAT of 25%, and instead set the rate to 0%. By “lowering” the prices on electrical cars politicians hoped to increase the demand for them, at the cost of petrol cars.
In 2001 electric cars accounted for a small part of the car fleet and were at best a very bad substitute for petrol/diesel cars. Electrical cars were something exotic. Since 2001 the number of electric cars have grown tremendously, between 2009 and 2013 the number has almost increased by a tenfold (SSB). Much of the growth can be subscribed to the technical improvements made over the last years, but the different incentives also play an important role.
Hybrid-cars and LPG-cars are not omitted by similar incentives, they only apply for fully electrified cars. Late in 2013 the Parliament decided that VAT on leasing of electrical cars should be set to 0%, this to juxtapose leasing with buying. This decision has still yet to be implemented due to concern in The Ministry of Finance (more) that exempting of VAT might be a violation of the EEA agreement.
When electrical cars were exempted from VAT in 2001, they accounted for a small part of the car fleet, and nobody thought about market distortion or illegal governmental subsidiaries. Wether it is market distortion and illegal governmental subsidiaries will be decided by ESA.