Value added tax (VAT) is a
type of sales tax. In some countries, including Australia,
Canada, New Zealand, and Singapore, this tax is known as
"goods and services tax" or GST; and in Japan
it is known as "consumption tax".
VAT is an indirect tax, in
that the tax is collected from someone other than the person
who actually bears the cost of the tax (namely the seller
rather than the consumer). As VAT is intended as a tax on
consumption, exports (which are, by definition, consumed
abroad) are usually not subject to VAT or VAT is refunded.
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Personal end-consumers of
products, consumers and services cannot recover VAT on purchases,
but businesses are able to recover VAT on the materials
and services that they buy to make further supplies or services
directly or indirectly sold to end-users.
In this way, the total tax
levied at each stage in the economic chain of supply is
a constant fraction of the value added by a business to
its products, and most of the cost of collecting the tax
is borne by business, rather than by the state. VAT was
invented because very high sales taxes and tariffs encourage
cheating and smuggling. It has been criticized on the grounds
that it is a regressive tax.
VAT differs from a conventional
sales tax in that VAT is levied on every business as a fraction
of the price of each taxable sale they make, but they are
in turn reimbursed VAT on their purchases, so the VAT is
applied to the value added to the goods at each stage of
production.
Sales taxes are normally only
charged on final sales to consumers: because of reimbursement,
VAT has the same overall economic effect on final prices.
The main difference is the extra accounting required by
those in the middle of the supply chain; this disadvantage
of VAT is balanced by application of the same tax to each
member of the production chain regardless of its position
in it and the position of its customers, reducing the effort
required to check and certify their status.
When the VAT has few, if any
exemptions such as with GST in New Zealand, payment of VAT
is even simpler.
The "Value added tax"
has been criticized as the burden of it relies on personal
end-consumers of products and is therefore, as any sales
tax based on the consumption of essentials, a regressive
tax (the poor pay more, in comparison, than the rich). French
President Jacques Chirac has often pleaded for a reduction
of European VAT concerning catering, in order to win favour
from this sector.
What
is VAT? | VAT
in the European Union | Taxing
financial services: a future with options |
VAT
on imports and exports | The
history of VAT | Guide
to outputs and output tax |
Ten
VAT Tips to save you time and money | VAT
Registration - Tips and Traps
