What is VAT?
VAT is a tax charged at each point of sale on the consumption or use of goods and services. VAT is a form of indirect tax levied on the value added to a product or service at each stage of its production or distribution cycle, from raw materials to final consumption. It is charged by the seller when goods and services are sold and collected by the government. The seller then pays the collected tax to the government.
VAT is frequently charged on all purchases and sales of goods and services, including imports and exports. Each production or distribution cycle stage is calculated as a percentage of the value added to the good or service.
VAT is a tax form, meaning that the consumer, not the producer, pays it. It is included in the price of goods or services and is paid by the consumer at the time of purchase. The tax is collected by the government and is used to fund public services and infrastructure.
VAT is also used to encourage companies to spend money on R&D and to stimulate exports. VAT is an essential source of revenue for governments.
What is Sales Tax?
Sales Tax is a tax the government imposes on selling goods and services. It is collected by a retailer at the time of purchase and remitted to the government.
Sales Tax is a form of indirect tax, meaning it is paid by the consumer but collected by the business. Sales taxes are calculated as a percentage of the sale price. The tax rate will vary depending on the state, province, or country where the sale occurs.
Sales taxes are imposed on tangible items, such as cars and furniture, and intangible items, such as services and everyday items, subject to sales tax, including clothing, alcohol, gasoline, and restaurant meals. Items not subject to sales tax include groceries, prescription drugs, and medical devices.
Sales taxes are essential sources of revenue for local and state governments. They are used to fund public services such as education, healthcare, and infrastructure. They are also used to help offset budget deficits and fund tax cuts.
However, they are essential sources of revenue for governments and can help fund critical public services.
Difference Between VAT and Sales Tax
- VAT is deducted from the purchase price of goods and services, while Sales Tax is added to the same.
- VAT is imposed on the value-added of goods and services, while Sales Tax is imposed on selling goods and services.
- VAT is charged at different rates on different products, while Sales Tax is charged at a fixed rate.
- VAT is collected from the manufacturer/producer at each stage of the production process, while Sales Tax is collected from the final consumer.
- VAT is based on the value-added of goods and services, while Sales Tax is based on the sale amount.
Comparison Between VAT and Sales Tax
| Parameters of Comparison | VAT | Sales Tax |
| Stage Tax | Multi-Stage Tax | Single-Stage Tax |
| Collected by | collected by businesses and then paid to the government | collected by the government from the seller and paid directly to the government. |
| Based on | value-added of a product or service | the total price of the product or service |
| Levied on | both goods and services | , only imposed on goods |
| Type of tax | Consumption Tax | Transaction tax |
References
- The Sales Tax, the VAT, and Taxes in Between—or, Is the Only Good NRST a “VAT in Drag”? | National Tax Journal: Vol 52, No 3 (uchicago.edu)
- The Effects of Inflation, Exchange Rate, and Import on Value Added Tax and Sales Tax of Luxury Goods | Subiyanto | Budapest International Research and Critics Institute-Journal (BIRCI-Journal) (bircu-journal.com)