VAT is meant to be paid by businesses and passed along as an added cost to consumers.
Some countries exempt certain goods from VAT, such as food and medicine.
VAT was first introduced in France in 1954 and has since been adopted by many countries around the world.
What is the difference between VAT and Sales Tax?
VAT and sales tax are similar in that the value of an item is taxed when it is sold to the customer. But VAT does not apply when you buy an item for personal use.
When you purchase a product, there may be a sales tax or value-added tax (VAT). In some countries, these two taxes are interchangeable.
How Does a VAT work?
VAT is assessed at every step of the production process. The final consumer bears the full burden of the tax, which means that prices will increase on all goods and services subject to VAT.
However, some items are exempt from VAT such as goods purchased by charities for their own use.
VAT vs Goods and Services Tax (GST)
Value-added tax (VAT) is similar to the goods and services tax (GST) in that it’s a consumption tax. However, there are differences:
- VAT is a tax on the value added at each stage of production, whereas GST is a tax on all goods and services minus inputs. In this way, VAT can be thought of as an indirect or hidden sales tax.
- VAT applies only to businesses; consumers do not pay it directly. It is passed through from manufacturers or wholesalers to retailers who then collect it from customers.
Examples of VATs in Other Countries
VATs are collected when business owners sell their products or services to customers.
There are different types of VATs that can be levied, depending on the country you’re living in.
For example, some countries have a single-stage system where all transactions are taxed at one rate while others have multiple stages where there can be different rates based on what type of good or service you’re purchasing.
The U.S., Canada, Australia and New Zealand all use a two-stage system where there’s a lower rate for necessities like food and medical items but then higher rates for luxury items such as jewellery and cars.
Types of VAT
- Sales tax (or value-added)
- Excise tax
- Corporate income tax.
Key Points
- The key feature of VAT is that it taxes goods and services at each stage of production.
- VAT is also known as consumption-based taxes because it taxes what people consume rather than how much they earn or make.
- It is used in over 160 countries around the world.
- The final consumer bears the tax.
- VAT is also known as a value-added tax, consumption tax and turnover tax.
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