If you are in the US and selling goods and products. Then you are fortunate. In the US, there are some products that are exempted from any taxes throughout the supply chain. However, other nations are more inclined towards Value Added Tax (VAT).
There is a basic difference between these two taxation methods. If you are a student and want to pursue a career in taxation. Then here are the differences that you must need to understand.
A sales tax is the tax collected by the retailer at the end of the selling process. For instance, if a company is a manufacturer of refrigerators, the company will not pay sales tax on the refrigerators. Instead, the company will pay tax on the safety equipment that the employees are using. The equipment is not part of the final product. Hence, the company is liable to pay taxes on that.
Here are some of the typical sales that are exempted from sales tax.
- Goods purchased as resale.
- Components or parts purchased to make the final product.
- Machines that are directly used to make the goods.
- Container and packings.
A VAT or Value added tax is a form of tax that is collected throughout the supply chain. That means suppliers, distributors, manufacturers, producers, retailers, and wholesalers collect tax on every qualifying sale. The US does not have any concept of VAT, but some other countries consider VAT as Goods and Service Tax (GST).
Let’s understand VAT in a much more practical way. A component manufacturer buys raw materials from suppliers. Other organizations then assemble the parts. Then the retailer sells these computers to individual consumers during every phase of the cycle. A value is added to the product.
The VAT covers only the entity’s extra value and not the original price of the product.
One of the most highlighted differences will be perhaps the two’s documentation requirements when we come down to differences.
In the retail environment, the sales tax is established, and the consumers cannot do anything about it. The rate of sales tax will be the same at every level of the cycle. However, with the VAT, things change. In VAT, entities dealing with the product need to maintain thorough documentation to claim the VAT.
The VAT system imposes a sense of responsibility and self-governance on the system as the entities are entitled to look at the network as no to pay more than they can afford or less than the products worth.
For those who are not well aware of the key differences, we have listed the key points that will make it easier for you to understand.
- Sales taxes are the taxes businesses pay on the sales. But VAT is the addition of the value that is done by every entity throughout the supply chain (producer, manufacturer, distributor, retailer, etc.).
- Sales tax is a single-stage tax, where the taxation percentage is fixed. However, in the case of VAT, it is a multi-stage tax. The value is added at every stage of the supply chain.
- In the sales tax, entities can evade taxation. But with the VAT into play, taxation is checked at every level. Hence, evasions are reduced to none.
- In the sales tax, there are times when the phenomenon of double taxation takes place. However, this cascading effect can be caused by the VAT system.
- The sales tax is charged on the total value of the product. But in the case of the VAT, VAT is charged only on the value-added to the products.
- Sales tax is easy to calculate. However, VAT is quite complex, and you need a learning curve before you can calculate VAT.
- Sales tax has been the reason for the increased tax burden on Consumers. But in VAT, taxation is rationalized.
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