Why there is no VAT tax on loans/interests?

Value Added Tax (VAT) is not typically applied to loans or the interest charged on these loans because VAT is a consumption tax levied on goods and services that add value. In the case of loans and interest:

Non-Good or Service: Loans themselves are not considered goods or services. A loan is essentially a financial arrangement where money is temporarily transferred from the lender to the borrower. The lender does not provide a tangible product or a consumable service; instead, they are allowing the use of money for a period.

No Value Addition: VAT is charged on the value added to a product or service at each stage of its production or distribution. With loans, there is no additional value created when money is simply lent and repaid; money itself does not change in form or substance as a result of this process.

Principal and Interest: The principal amount of a loan is the original sum lent, which is repayable by the borrower and does not constitute an increase in value that would be taxable. Interest is considered a charge for the service of lending money, but it is generally treated differently from taxable goods and services. Taxing interest with VAT would also complicate the lending process and potentially make credit more expensive for consumers.

Regulatory and Economic Reasons: Exempting financial services such as loans from VAT is also motivated by regulatory and economic considerations. Applying VAT to these services could lead to double taxation (as interest incomes are often subject to other forms of taxation like income tax), and it could distort the allocation of capital by making financing activities artificially expensive.

Thus, loans and the interest on these loans are typically exempt from VAT to avoid complicating the financial system, prevent double taxation, and not discourage borrowing and lending activities, which are essential for economic growth.