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Value Added Tax

Value Added Tax (VAT), also known as a Goods and Services Tax (GST), is basically a consumption tax which is levied on the value added to a product. Unlike a sales tax which is levied on the total value at each stage of the number of times that a product passes between a manufacturer and the consumer, VAT does not apply to this method of taxation which has a cascading effect. VAT is basically an indirect tax that is levied on someone who does not have to take the burden of the entire tax amount.

VAT was first levied in 1954 in France by the tax authorities. It was initially targeted at big businesses and later extended to all businesses. Even today, it is the primary source of state funding and accounts for around 45% of revenues for the government.

While VAT cannot be recovered by personal end-consumers on the purchases they make, businesses can recover VAT on the services and materials they purchase in order to make further services and supplies for sale to end-consumers. Hence, the total amount of tax levied at each stage of this process is always a fraction of the value a business adds to its products. So most of the cost incurred in collecting tax is taken on by the business rather than the state. VAT was basically introduced because the high incidence of sales tax and tariffs was leading to smuggling and cheating. However, VAT has been condemned as a regressive tax like other forms of consumption taxes.

Since VAT only taxes the value which is added at each stage of production, it eliminates the cascading effect of sales tax. It has become the preferred form of taxation over sales tax in most parts of the world. VAT generally applies to the commercial activities involved in the provision of services and the production and distribution of all goods. It is evaluated and collected on the value added to all the goods involved in every business transaction. In other words, tax is paid to the government on the gross margins of transactions.

VAT has a similar effect on the final price of a product as a sales tax which is usually charged on the final sale price to a consumer. The primary difference between the two lies in the accounting procedures which are needed from those who are midway in the supply chain. This is a drawback of the VAT which is balanced out by the same tax being applied to every member in the production chain regardless of position and status of consumers, thereby decreasing the amount of work needed for checking and certification of their positions. When there are a few exemptions in the VAT system, as with the GST in New Zealand, paying VAT is simplified.

It is believed that if sales tax goes over 10%, people are tempted to adopt methods of tax evasion such as pretending to be business owners, buying things in the employers name, buying at wholesale levels and shopping on the internet. VAT, on the other hand, can rise over 10% without causing tax evasion thanks to the collection mechanism which is practiced. However, VAT is easily targeted for fraudulent practices such as carousel fraud which can result in the loss of tax revenues for states, precisely because of the collection mechanism.

VAT is usually implemented by a business paying a percentage of a products price less the taxes already paid on the goods. Suppliers are motivated by the businesses to pay taxes, thereby permitting higher VAT rates compared to a retail sales tax, and causing less evasion of tax. The VAT paid is 10% of the profit, or the value added.

Tags: check, government, price, revenue, tax, Taxation

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