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Value Added Tax (VAT) is a Consumption Tax levied on the value added to goods and services. It is a tax on the final consumption of goods and services. The value-added is the difference between the cost of the goods and services at each production stage and the selling price.
History of Value Added Tax (VAT)?
Value-added tax (VAT) is a form of indirect taxation levied on goods and services. It is a tax added to the price of a product or service at each stage of the supply chain. The purchaser pays the tax, but the seller collects it. The seller then remits the tax to the government.
VAT was first introduced in France in 1954. Other European countries later adopted it. In the United States, it was first introduced in 1991.
Methods of Value Added Tax (VAT) Computation?
There are three value-added tax (VAT) computation methods: the invoice method, the credit method, and the cash method. The invoicing method is the most common. Under this method, the VAT due is the difference between the VAT-inclusive price of the goods or services and the VAT-exclusive price. The credit method is used when the supplier is registered for VAT and the purchaser is not. Under this method, the supplier charges VAT on the full amount of the invoice, and the purchaser can claim a credit for the same amount when they file their tax return. The cash method is used when the supplier is not registered for VAT and the purchaser is registered. Under this method, the supplier charges VAT on the net amount of the invoice. The purchaser can claim a credit for the same amount when filing their tax return.
How does Value Added Tax (VAT) work?
VAT is a consumption tax levied on the value added to goods and services. It is collected by businesses at each stage of production and distribution and is ultimately paid for by the consumer. The government sets the VAT rate, generally expressed as a percentage of the sale price.
Value-Added Tax vs. Sales Tax:
What’s the Difference?
- Sales tax is a tax levied on the sale of goods and services. Value-added tax (VAT) is levied on the value added to goods and services. In other words, sales tax is levied on the final sale price of a good or service, while VAT is levied on each step of the production and distribution process.
- For example, imagine that good is sold for $100. The seller would be responsible for paying $10 in sales tax to the government. Under a VAT system, the seller would be responsible for paying $20 in VAT. The seller would be taxed on the $100 sale price and the $10 value-added during the production and distribution process.
Advantages of VAT:
Value Added Tax (VAT)?
- A Value Added Tax (VAT) is a sales tax assessed on the value added to a product or service at each stage of production or distribution.
- The main advantage of a VAT is that it is a relatively efficient tax. It is difficult to evade and is collected at each stage of the production and distribution process. This means that the tax is less likely to be avoided or evaded, and it is more likely to be collected.
- A VAT also has the advantage of being a progressive tax. It imposes a higher tax rate on high-income earners than on low-income earners. This can help to reduce income inequality.
Disadvantages of VAT:
Value Added Tax (VAT)?
- It is a complex tax system that is difficult to understand.
- It is a regressive tax, meaning that it takes a larger percentage of income from low-income earners than from high-income earners.
- It can discourage spending and economic growth.
- It can be difficult for businesses to administer.
