Understand Value Added tax

Understand What is Value Added Tax (VAT) ?

Value Added Tax:

Value-added tax (VAT) is a type of consumption tax that is levied on the sale of goods and services. It is a tax on the value added to a product or service at each stage of the supply chain, from production to final sale to the consumer. VAT is a form of indirect tax, which means that it is collected by one entity in the supply chain and passed on to the next entity, rather than being directly paid to the government by the consumer. VAT is used in many countries around the world as a means of raising revenue for the government.

One example of how VAT works is as follows:

  1. A manufacturer produces a good and sells it to a wholesaler for $100. The manufacturer charges a VAT of 10% on the sale, so the total price the wholesaler pays is $110 ($100 + $10 VAT).
  2. The wholesaler then sells the good to a retailer for $120. The wholesaler charges a VAT of 10% on the sale, so the total price the retailer pays is $132 ($120 + $12 VAT).
  3. The retailer then sells the good to a consumer for $150. The retailer charges a VAT of 10% on the sale, so the total price the consumer pays is $165 ($150 + $15 VAT).

In this example, the manufacturer, wholesaler, and retailer all add value to the good by participating in the supply chain, and they all charge VAT on their sales. The consumer ultimately pays the VAT when they purchase the good, but it is collected and passed on at each stage of the supply chain.

There are several advantages to VAT as a form of taxation. One advantage is that it is a relatively simple and transparent system. VAT is easy to administer because it is collected at each stage of the supply chain, and businesses are required to keep records of their sales and VAT payments. This makes it easy for governments to monitor compliance and enforce the tax.

Another advantage of VAT is that it is generally considered to be a more neutral form of taxation compared to other types of taxes, such as corporate income tax or personal income tax. This is because VAT is applied equally to all goods and services, regardless of the type of business or the income level of the consumer. This helps to promote fairness and reduces the potential for tax evasion or avoidance.

There are also some disadvantages to VAT, however. One disadvantage is that it can be regressive, meaning that it disproportionately affects lower-income individuals. This is because VAT is a consumption tax, and lower-income individuals tend to spend a larger portion of their income on consumption compared to higher-income individuals. As a result, lower-income individuals may bear a greater burden of VAT compared to higher-income individuals.

Another disadvantage of VAT is that it can create compliance costs for businesses. Businesses are required to keep detailed records of their sales and VAT payments, and they must file regular returns with the government. This can be burdensome for small businesses, in particular.

Here are three examples of how VAT is applied in different countries:

  1. In the European Union (EU), VAT is applied at a standard rate of at least 15% on most goods and services. Member states are allowed to set their own VAT rates, within certain limits, and many countries have multiple VAT rates for different types of goods and services. For example, in Germany, the standard VAT rate is 19%, but there is a reduced rate of 7% for certain essential goods and services, such as food, books, and public transportation.
  2. In Canada, VAT is known as the goods and services tax (GST). The GST is applied at a rate of 5%
  3. In United Arab Emirates Value Added Tax is Charged At 5%.