Value added tax

VAT is a consumption tax on products and services applied at each level of the supply chain where value is added, from initial manufacturing through the point of sale. The amount of VAT a user pays is determined by subtracting the cost of the product from any costs of ingredients in the product that have already been taxed.

VAT

A value-added tax (VAT), sometimes known as a goods and services tax (GST) in some countries, is a sort of incremental tax. It is applied to the price of a product or service at every stage of manufacture, distribution, and sale to the final customer. 

If the final customer is a company that collects and pays VAT on its products or services to the government, it might recover the tax. It resembles and is frequently likened to, a sales tax.

Understanding the V.A.T. (VAT)

VAT is calculated on the basis of consumption rather than income. Unlike a progressive income tax, which imposes higher taxes on the rich, VAT is applied uniformly to all purchases.

A VAT system is used in over 160 countries. The European Union is the most common place to find it (EU). It is not, however, without debate. 

Advocates claim that the VAT increases government revenue without increasing the burden on rich taxpayers, as income taxes do.

How does VAT work?

At each stage of the manufacture, distribution, and sale of an item, VAT is imposed on the gross margin. At each level, the tax is assessed and collected. This differs from a sales tax system, in which the tax is only assessed and paid at the end of the supply chain by the consumer. 1

Assume that in the fictional nation of Alexia, a sweet named Dulce is created and marketed. The VAT rate in Alexia is 10%.

Here’s how the VAT would function in practice:

Dulce’s producer pays $2 for the raw ingredients, plus a 20-cent VAT to the Alexian government, for a total of $2.20.

Dulce is then sold to a merchant for $5 + 50 cents in VAT, for a total of $5.50. The producer only pays Alexia 30 cents, which is the total VAT at this time, less the VAT levied by the raw material supplier previously. It’s worth noting that 30 cents equals 10% of the manufacturer’s $3 gross margin.

The Value-Added Tax (VAT) has a long and illustrious (VAT)

VAT was mostly conceived in Europe. Although the notion of charging each stage of the manufacturing process was initially discussed a century earlier in Germany, it was established by French tax administrator Maurice Lauré in 1954. 5

A VAT system is used by the great majority of industrialised nations that make up the Organisation for Economic Co-operation and Development (OECD). The United States continues to be an outlier.

VAT as an example

The following is an example of a 10% VAT applied sequentially across a production chain:

A merchant sells raw materials made of various metals to an electronic component maker. At this point in the manufacturing process, the metals dealer is also the seller. The dealer bills the manufacturer $1 plus a ten-cent VAT, and then remits the ten-percent VAT to the government.

The factory turns the raw ingredients into electronic components, which it then sells for $2 plus a 20-cent VAT to a cell phone maker. The manufacturer gives the government ten cents of the VAT it collects and keeps the other ten cents, which reimburses it for the VAT it paid to the metals dealer earlier.

By producing mobile phones, the cell phone producer adds value to the product, which it then sells to a cell phone store for $3 plus a 30-cent VAT. It pays the government ten cents of the VAT. The remaining 20 cents are used to compensate the mobile phone company for the VAT it paid to the electronic component company.

Finally, the shop sells a phone to a customer for $5 plus a 50-cent VAT, of which 20 cents goes to the government and the rest goes to the retailer as compensation for the VAT it already paid.

The VAT paid at each selling point along the process is equal to 10% of the seller’s value added.

Conclusion:

VAT is a consumption tax on products and services applied at each level of the supply chain where value is added, from initial manufacturing through point of sale. The amount of VAT a user pays is determined by subtracting the cost of the product from any costs of ingredients in the product that have already been taxed. VAT is calculated on the basis of consumption rather than income. Unlike a progressive income tax, which imposes higher taxes on the rich, VAT is applied uniformly to all purchases.