Value-added tax
Value-added tax (VAT), is a consumption tax levied on the sale of goods and services. In some countries, including Singapore, Australia, New Zealand and Canada, this tax is known as "goods and services tax (GST)".
Personal end-consumers of products and services cannot recover VAT on purchases. In this way, the total tax levied is a 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.
VAT in the European Union
A common VAT system is compulsory for members of the European Union, under directive 77/388/EEC, which specifies a minimum rate of 15% although different rates apply in the various member states.
Following changes introduced on July 1, 2003 (under directive 2002/38/EC), non-EU businesses providing digital electronic commerce and entertainment products and services to EU countries are also required to register with the European tax authorities, and to collect VAT on their sales at the appropriate rate according to the location of the purchaser.
Comparison with Sales Tax
The difference from conventional sales tax is that it is levied on every business as a fraction of the price of each sale they make, but they are in turn reimbursed VAT on their purchases, hence the tax is applied to the value of the goods that has been added.
Example
Without a VAT:
- A widget manufacturer spends $1 on raw materials to make a widget.
- The widget is sold wholesale to a widget retailer for $1.20.
- The widget retailer then sells the widget to a widget consumer for $1.50.
Adding on a 10% VAT:
- The manufacturer pays $1.10 for the raw materials.
- The manufacturer charges the retailer $1.32 and pays the government $0.02, leaving the same profit of $0.20.
- The retailer charges the consumer $1.65 and pays the government $0.03, leaving the same profit of $0.30
So the consumer has paid 10% extra. The businesses have not lost anything directly to the tax, but they do have the extra paperwork to do so that they correctly pass on to the government the difference between what they collect in VAT (an 11th of their income) and what they spend in VAT (an 11th of their expenditure).
VAT Rates
See also: Sales tax, GST (Canada)
External links
Referenced By
Economics articles (master list) | European Communities | European Union | List of European Union pages | List of economics articles | List of economics topics | Regressive tax | Sales Tax | Tampon | Tampons
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