In this study the author presents the importance and role of value added tax (VAT), as an element of the tax systems of modern states, starting with its appearance in mid-twentieth century in France, up to nowdays. In addition to the elaboration of value added tax appearance and its basic types and classifications , special attention is given to the comparative review of the advantages and disadvantages of value added tax and sales tax at retail. All the reasons why the sales tax on retail is replaced by a new tax form are listed, with a comparative view of value added tax introduction years and tax rates levels in the Member States of the European Union and the Republic of Serbia. Also, all the major features of the value added tax as the modern tax form are covered, including analysis of its relation to other existing tax forms and comparison of the degree of conformity of the tax legislation of the Republic of Serbia with the relevant European Union Directive on value added tax. All the functions of value added tax are highlighted, as well as its potential impact on the inflationary effects in the state, concluding that the introduction of new tax forms in the tax system of the Republic of Serbia led to the fact that it became a very important element of public budget revenues. It is also emphasized that the entire tax policy is one of the main instruments of stabilization policy which affects the development and stability of the economy, the establishment of savings, movement of investment and employment, the distribution of national income, relations in foreign trade and so on.