when you hear the word “Value Added Tax” what comes to mind? How much do you know about the VAT taxes? would you love to find out? then let’s explore together!
The word VAT is very common today and although almost everyone pays VAT on the goods and services they consume, many do not know what VAT means or what it is really about.
In this article we seek to inform and enlighten you about Value Added Tax (VAT), the types, pros and cons and other frequently asked questions about Value Added Tax VAT will also be answered here. Let us begin by defining VAT.
What is Value Added Tax (VAT)?
Value added tax (VAT) is a type of tax that is placed on goods and services at each stage where value is added to that product.
The value added tax is levied incrementally i.e at every point of sale from raw materials to finished goods, from manufacturer to wholesalers then to retailers and final consumer, a tax is placed on the price at each stage that the product undergoes before reaching the final consumer. In some countries it is referred to as goods and services tax (GST).
Types of Value Added Tax (VAT)
- Consumption Type VAT
- Revenue Type VAT
- Gross National Product (GNP) Type VAT
- Consumption Type VAT: this is the most common type of VAT. It is the VAT levied on goods and services consumed that is why it is referred to as consumption VAT or intake VAT.
- Revenue Type VAT: this tax is levied on both consumption and net investment. It is also referred to as earnings or income VAT.
- Gross National Product (GNP) Type VAT: this tax is levied on both consumption and gross investment. It’s tax base is Gross Domestic Product (GDP).
What are the examples of Value Added Tax (VAT)
An example of a 10% VAT levied on a product through the process of production from the purchase of the raw material to the final consumer would occur in the following sequence
The manufacturer spends (£1 × 1.10) = £1.10 for the raw materials, and the seller of the raw materials pays the government £0.10 as VAT.
The manufacturer charges the retailer (£1.20 × 1.10) = £1.32 and pays the government (£0.12 minus £0.10) = £0.02 as VAT, leaving the same gross margin of (£1.32 – £1.10 – £0.02) = £0.20.
The retailer charges the consumer (£1.50 × 1.10) = £1.65 and pays the government (£0.15 minus £0.12) = £0.03 as VAT, leaving the same gross margin of (£1.65 – £1.32 – £0.03) = £0.30.
Does VAT have any Benefits?
wondering what the benefits of VAT can be? Value added tax has its benefits which includes :
- Ease in the administration of tax
- It discourages tax evasion
- It increases the revenue gotten from tax for the the government to use for public services such
Disadvantages of VAT
Just like everything else, VAT isnt without its own downside and vulnerabilities and these includes
- It may lead to increase in the final cost of goods and services
- There are some goods that are tax exempt and thereby a VAT cannot be added to them.
Does the United States of America have Value added Tax?
Although the Value Added Tax is common in most European countries, the United States of America does not have Value Added Tax, the United States government raises money mainly through income tax
What is the difference between VAT and Sales Tax?
Though VAT and Sales Tax may seem similar as both are consumption tax, the main difference is that Sales Tax is paid once at the point of sale while VAT is paid throughout our the production and distribution stage of a product
Is VAT multiple Taxation?
It is necessary to note that VAT us not multiple taxations, although it may seem that way because it is paid different stages, it is referred to as a multistage tax.
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