Can you explain simply what value added tax (VAT) is please?

In simplest terms, the Value Added Tax, instead of simply collecting a tax on the final product at the time of retail, consumer sale, it collects a tax on all the pieces used to manufacture a product as they go through different companies.

Take, for example, a pencil. A pencil is made of four parts: graphite, wood, rubber (eraser) and the weird metal thing that holds the eraser on.

Company 1 mines the graphite and sells it to Company 2, the graphite refiner people - the government taxes this sale.

Company 2 refines the graphite and gets it all ready to be put into a pencil, then sells this refined graphite to the Pencil Company - the government taxes this sale.

Company 3 harvests lumber, then sells it to Company 4, which will refine the lumber - the government taxes this sale.

Company 4 sells the refined lumber to the Pencil Company - the government taxes this sale.

Company 5 makes the eraser, then sells it to the Pencil Company - the government taxes this sale.

Company 6 makes those odd metal things, then sells them to the Pencil Company - the government taxes this sale.

The Pencil Company assembles all the pieces into a pencil, then sells that to retailers - the government taxes this sale.

The retailers then sell the pencils to consumers. The government does NOT directly tax this sale; but, all the taxes that went into the making of the pencil waterfall over into the final cost.

In broad terms, the best way to think about it is that every time Value is Added to the product, there is a tax - thus, the Value Added tax. In the above example, the graphite refiner receives unrefined graphite and refines it, adding value to the graphite for its resale - so that resale is taxed.

And naturally, this is a simplified version - there's dozens of other places where value is added (think packaging, instructions, warranty, etc.), and dozens of companies are involved in the creation of every product.

The benefit to the VAT tax is that it discourages black markets - black markets thrive when there's a high sales tax because sales tax doesn't show in black markets. But with a Value Added Tax, the companies that made the product are taxed, passing the tax on to the consumers inherently - so the black market doesn't dodge that.

The only major drawback to the VAT tax (compared to straight sales tax) is that it is more expensive to enforce, as you must tax every manufacturer, not just every retailer. Still less expensive to enforce than income tax though.

That's it in broad terms. If you're still unclear on how the costs get passed on to the consumer, let me know and I'll detail that part too.

Value added tax (VAT), or goods and services tax (GST), is tax on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A 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). To avoid double taxation on final consumption, exports (which by definition, are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.

The VAT was invented by a French economist in 1954. Maurice LaurÃ©, joint director of the French tax authority, the Direction gÃ©nÃ©rale des impÃ´ts, as taxe sur la valeur ajoutÃ©e (TVA in French) was first to introduce VAT with effect from 10 April 1954 for large businesses, and extended over time to all business sectors. In France, it is the most important source of state finance, accounting for approximately 45% of state revenues.[citation needed]

Personal end-consumers of products 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 or in some countries eg Singapore, called it goods & services tax (GST). In simple term, it is a tax imposed by govt on goods or services that you used or buy.

For tourists, you may be able to get a refund on VAT charged normally at the airport. Thailand, Philippines and Singapore do allow such refund. Do remeber to keep the receipts when make any purchases while travelling overseas.

Prof Choo
http://realincomeinternethomebusiness.blogspot.com

Simply VAT is paying tax to authorities on value additions i.e on the margins accrued.The regn. no is the link between the purchaser and seller.

Everytime you add value, you tax, so a fish may get taxed several times, once when its caught, then when it is fileted then when its packaged, then when its shipped. You've added value, so the government taxes the value you added. I believe this is getting unpopular in Britain.

I know if you are traveling internationaly you can get this refunded to you

http://en.wikipedia.org/wiki/Value_added_tax

Depending which country you reside; it's still a government tax, based on capitalism the America way... the governments want a percentage share of the total economic market so, a VAT is added BUT the actual value of the goods doesn't increase. A vehicle might last ten years and sold twenty times in this period..the VAT percentage doesn't change so, its possible the accumulated VAT (10-years) is worth more than the vehicle? As the VAT falsely inflats the VALUE paid, consider that the governments cost of operation is also inflated more than, the rate of income tax, per the individual.
Governments, world wide, are spending more and hiding the various taxes in many ways...

too complicated. Find a CAP to help you do the numbers. safe and easy and you deduct the CAP fee next year.

It is an indirect tax to the value added in the chain of production/selling of a product, being paid by the final consumer and collected from every previous member from the chain.

You're a final consumer when you cannot justify the buying as part of your "production process", thus you cannot claim a refund for the VAT.

For the ones in the middle of this chain, they add the VAT percetage to the product price (let say, 10%) to sell it, and collect the tax, while paying for the product or its part plus the same percentage over the price (since you earn money in this process and add value to the product, you're paying VAT over your costs that should be less than your income). In a monthly basis you net the bills payed and the bills collected, along with their respective VATs. The difference between the VAT you collected and the ones you paid would be the real tax ammount you have to pay.

As to prove it, you have to keep the copies from your bills and the bills you've paid. But you want to minimize your taxes, so you'll need a bill for every buy you make. The more bills you have, the less tax you'll pay. Thus, this enforces you to request the bills from your providers, since if you don't, you'd be paying the whole VAT tax from your pocket as if you were a final consumer. As a consecuence, every one in the chain maximize their income by avoiding the black market.

You may want to avoid collect the VAT and hide the transaction (i.e., sell in the black market), but your customer (the next guy in the chain) won't make the transaction unless you produce a bill allowing him to deduct the VAT.

For the IRS, the whole system can be controlled and the transactions audited: the copies from the bills you've made must match your customer's bill, both you and him reported them to the IRS as to minimize the tax, and you have to produce the bills and the copies under request.

So far, you have a virtuous cycle, the problem brings up with the final consumer, the one who ultimatelly pays the whole VAT from his pocket without a refund. He would request to buy from you without a bill to avoid the tax, but for you it'd be a problem to sell this way in a regular basis, because when you net the bills ti will look as you're losing money, which would be suspicious. Anyway, you could keep track fo your transactions as to sell to some of the final consumers without the VAT (let say, collecting half of the VAT amount for your pocket while saving the other half from your customer pocket), taking care not to look as if you were losing money. And if you manage to do so, this could kick back through the entire chain: you'd be able to make the same sort of arrangement with your providers, and so forth, eroding the system.

So the critical problem for the State is the way to control the final consumer's transactions.

There are other weak points. For example, in order to cheat, you may duplicate the bills, reporting and producing fake bills with lesser ammounts than the original ones (you reduce your claimed income, thus reducing the tax you'd pay from your pocket). This turns into a huge bureaucratic effort from the State in order to match the bills to detect the fraudulent ones, and in order to minimize this effort, this auditing process could be distributed by means of including new actors into the scene, like requesting the bills forms to be printed and enumerated by a trusted printing company whose identification will be stamped in every form, that reports this process back to the IRS.

Those problems have no easy solution, and the effort to solve them increases the costs, as an expense to the chain members, and indirectly as an operative expense to the State that must be covered by the same VAT. This increases the impact to the final consumer, reducing his aquisitive power and eroding the market. Because of this it is said the VAT is a regressive tax.

A value added tax is an indirect tax that is supposed to replace sales tax. It works in developed and developing countries and made successful in performance.

its a tax used in europe on goods and services. Who knows what the economic reason for it is. It a government money grab basically. In Canada, we have the GST which is called the goods and services tax. Our new government has recently been working hard to reduce it.

Well, let me try. The Value Added Tax is a percentage from the cost of every item you buy that you pay. I think is used to make our lifes better, because that's the idea of taxes, however, I am not really sure about what else to tell you.

it is what is added to your item that you are buying.

A tool for the government to tax the non-productive residents, ie. those not directly paying income tax.

If a child or a retired old folks buy something with VAT, tax is collected, a certain amount is paid to the govt.

VAT taxes on transactions or expenditures. It is a regressive system and taxes on consumption. It is normally a certain percentage of the transacted price. So the more transactions/exchanges/expenditures the more VAT will be collected the govt.

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.014
Copyright (c) 2011 Financial Crisis Tuesday, May 29, 2012 - Terms of use - Privacy Policy