Other Definitions
value added tax (dict)
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Value Added TaxValue added tax (VAT) is a sales 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" or GST. 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. VAT was invented by Maurice Laur, joint director of the French tax authority, the Direction gnrale des impts, as taxe sur la valeur ajoute (TVA in French) in the 1950s. 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. VAT in the European Union A common VAT system is compulsory. Under the EU system of VAT, where a person carrying on an economic activity supplies goods and services to another person, and the value of the supplies passes financial limits, the supplier is required to register with the local taxation authorities and charge its customers, and account to the local taxation authority for, VAT (although the price may be inclusive of VAT, so VAT is included as part of the agreed price, or exclusive of VAT, so VAT is payable in addition to the agreed price). VAT that is charged by a business and paid by its customers is known as output VAT (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as input VAT (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government. For example, exported goods or services are typically exempt from VAT in which case a company can easily pay more VAT than it collects. In this case, it will reclaim the difference from the government. If the reimbursement occurs quickly, the tax will have little effect on exports. If not, the delay or, worse yet, non-repayment of VAT on exports discriminates against exports as happens in some developing countries with ineffective or corrupt bureaucracies. Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the VAT. Finally, some goods and services are "zero rated" (otherwise known, in the Sixth Directive, as exempt with the right to deduct input This means that no VAT is charged on the supply of those goods and services but the supplier is still able to recover input VAT attributable to these supplies. This effectively provides a governmental subsidy for these supplies. The differences between different rates of VAT was often originally justified by certain products being "luxuries" and thus bearing high rates of VAT, whereas other items were deemed to be "essentials" and thus bearing lower rates of VAT. However, often high rates persisted long after the argument was no longer valid. For instance, France taxed cars as a luxury product (33%) up into the 1980s, when most of the French households owned one or more cars. Similarly, in the UK, clothing for children is "zero rated" whereas clothing for adults is subject to VAT at the standard rate of 17.5%. Comparison with a sales 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. Since sales taxes are applied to the total price at each stage of production, they tend to compound, growing into very high tax rates on products with numerous stages of production done by different economic units. This discourages specialization and, instead, encourages integrated production units even when integration (e.g., from raw materials to final product) is less efficient. 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, making a profit of $0.20.
- The widget retailer then sells the widget to a widget consumer for $1.50, making a profit of $0.30.
With a VAT Adding on a 10% VAT: - The manufacturer pays $1.10 for the raw materials, and the seller of the raw materials pays the government $0.10.
- The manufacturer charges the retailer $1.32 and pays the government $0.02 ($0.12 minus $0.10), leaving the same profit of $0.20.
- The retailer charges the consumer $1.65 and pays the government $0.03 ($0.15 minus $0.12), leaving the same profit of $0.30.
So the consumer has paid 10% ($0.15) 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 (output VAT, an 11th of their income) and what they spend in VAT (input VAT, an 11th of their expenditure). With a U.S.-style sales tax With a 10% sales tax: - The manufacturer pays $1.00 for the raw materials.
- The manufacturer charges the retailer $1.20, leaving the same profit of $0.20.
- The retailer charges the consumer $1.65 and pays the government $0.15, leaving the same profit of $0.30.
So the consumer has paid 10% ($0.15) extra. The retailers 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. Supplier and manufacturers are unaffected by the tax. VAT Rates Non-EU countries EU countries See also External links
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