What is the difference between VAT/GST and sales tax?

Updated on May 14, 2022

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This “value-added tax,” or VAT, Using a VAT calculator, you can figure out how much VAT you’ll have to pay and how much the purchase will cost you based on its net value. In addition, you can use our calculator to change the net/gross sum to include or exclude VAT. In order to utilise our online VAT calculator, you may wish to read up on the subject: what is VAT, how to calculate VAT manually, and what its economic ramifications are, as well as some fascinating facts.

VAT definition

Known as the goods and services tax (GST) in some countries, the value added tax (VAT) is a consumption tax that is applied to both commodities and services (Australia, Canada, New Zealand, and Singapore). Tax on added value is referred to by the name because it applies to products that are sold after deducting costs such as materials and other taxable inputs (see below for an example). The sales tax is another example of a consumption tax.

What is the difference between VAT/GST and sales tax?

VAT/GST is a “multi-stage tax” since it applies to all stages of the production of goods and services and is computed exclusively on the “added value.” In other words, only the “added value” that each participant in the manufacturing chain creates is subject to VAT. This procedure continues until the product is delivered to the consumer, its ultimate receiver. He or she is the ultimate carrier of the tax burden because he or she does not create any “added value.”

Instead, retail sales tax is a one-time assessment made on the entire sale price of goods and services. Taxes are paid once rather than being computed over and over again as is the case with VAT.

Comparing VAT and sales tax is made easier with this sample table. Consider a scenario in which a sawmill owner pays $100 for a barrel of wood that a lumberjack cut down for free. It costs $150 to cut and split an acorn into oak staves by the sawmill owner. The shopkeeper then sells the barrel to the buyer for $350 after the cooper sells it to him for $300. Value added at each stage of the process adds up to $35, which is 10% of the overall value added. When a 10 percent sales tax rate is used, the tax paid is the same regardless of where it is collected, but only at the point of sale to the customer.

Stage Product Price Value Added 10 % VAT 10 % Retail Sales Tax
1 log $100 $100 $10
2 stave $150 $50 $5
3 barrel $300 $150 $15
4 barrel $350 $50 $5 $35
Total Tax $35 $35

Despite the fact that VAT has a larger administrative expense since it is applied more widely, it may be more preferable from a political point of view because it is less visible to the final customer (Wells and Slesher, 1999).

What is the difference between VAT and GST?

Taxes like VAT and GST are commonly used interchangeably, however there are distinct variances in their applications. On the other hand, the VAT procedure is based on the production/distribution chain in contrast to GST, which is found in the supply chain. GST, on the other hand, is linked to the point of supply, but VAT is not.

VAT is also a tax on the final consumption of goods and services that is totally paid by the consumer. To put it another way, unlike VAT, the GST is a single tax on the provision of goods and services. Because the input taxes paid at each level can be used as credits in the succeeding stage of value addition, GST is really merely a tax on value addition at each stage. As a result, only the GST levied by the last dealer in the supply chain will be passed on to the final customer, with set-off benefits accruing along the way.

In addition, unlike VAT is based on a summary of transactions over a set period, GST is entirely online. Furthermore, the seller is in charge of revenue collection in the VAT system, but the purchaser is in control of recordkeeping in the GST system.

One of the main differences between the two systems is the issue of double taxation in the case of a VAT regime, as the tax on excisable items can also be applied on the manufacturer. In contrast, since the GST includes excise tax, the principle of double taxation is null and void.

Margin and VAT procedure

The VAT margin plan is an alternative VAT taxation method available to some businesses. On the other hand, this VAT procedure enables enterprises to pay VAT based on their profit margin on goods sold. Sellers are not allowed to deduct VAT on acquired products or services, unlike ordinary VAT. You can use our gross margin calculator to figure out your profit margin first. Try the margin and VAT if you wish to combine it with VAT (it has nothing to do with the “VAT margin scheme”, though).

How to work out VAT

In order to figure out the VAT, you must:

Determine the final cost (VAT exclusive price). Let’s go with €50.
Find out how much the value-added tax is. In our scenario, the percentage will be 23%. Dividing it by 100 in percentages is the best way to represent it 23/100 = 0.23, therefore.
The net amount is multiplied by the applicable VAT rate to arrive at the VAT amount. 50 euros multiplied by a factor of 2.3 results in a price tag of 11.50 euros.
Multiplying the net price by VAT (again, €11.50) rate and then adding it to the VAT exclusive price gives you the VAT inclusive, which is what you need to know in order to calculate the final price. €50 + €11.50 = €61.50.
The net-to-gross conversion is all that it is, in the end. Use our VAT calculator online if you’re in a hurry.

When can VAT be refunded

There are limited conditions when the paid VAT is refunded. The following points summarize certain situations linked with VAT paid in the European Union (EU) countries.

Cross-border refunds to EU businesses: VAT paid during cross-border trades that are occasionally undertaken between EU countries.

VAT refunds for non-EU enterprises: firms not based in the EU can omit VAT when they do transactions with EU countries.

VAT refunds to foreign tourists: if you intend to visit the EU, it is worth to know that you may be eligible to recover the VAT paid during your purchase.

You may find the VAT procedure and official directions on how to work out VAT refund on the following websites:

Valax in the Unitedue added t States

The United States is the only individual member of the OECD (Organisation for Economic Cooperation and Development) countries that does not have a national-level value added tax. A state or a municipality, not the federal or state government, is in charge of collecting and administering sales taxes. There are currently no sales tax laws in Alaska, Delaware, Montana, New Hampshire or Oregon.

In addition to country-specific characteristics and historical context, tax systems evolve in tandem with a country’s economic structure. You can continue reading, and in the following section, you’ll learn more about this topic.

Economic implications of the value-added tax

According to Benjamin Franklin’s words from 1798, “Death and taxes are the only certainties in this world.” For centuries, taxation has been an essential part of daily life, with the first recorded instance occurring in Ancient Egypt approximately 2390 BC, when grains were used to collect taxes, according to Burg (2004). For more industrialised countries, taxing became a part of practically every human activity and consumption as a result of the rise of industry in the 18th century. VATs political and economic considerations were crucial as government tax generally accounts for a significant portion of government revenue.

As a percentage of overall taxation, VAT is shown in the following graph from 2014.

In 2014, the percentage of total taxation accounted for by VAT was calculated using this calculator.

Overseas Development Organization (OECD)

Depending on the theoretical approach and the form of tax, the economic effects of taxes might vary. The economy can be impacted in a variety of ways by changes to the VAT structure, including changes to the scope of the tax or the tax rate.

  • It may affect saving behavior

As is the case with many economic topics, economists have differing views on the impact of varying tax loads. One of the more contentious debates involves the relative merits of levying a consumption tax versus an income tax. Savings behaviour is distorted, according to many in the field, when the amount of money people have accessible after taxes is reduced because of the taxation that occurs as a result of their income. Consumption taxes appear only when savings are spent, therefore they have no impact on saving habits. Increasing the reliance on consumption tax may be more beneficial to economic growth because larger savings lead to more investment.

Government revenues in the United States are more dependent on individual income taxes than in European countries where consumption taxes account for the majority of government revenue. According to proponents of the idea, a consumption-based tax system would encourage people to save more money and therefore help the economy. A rise in personal savings would spur an increase in production and the standard of life.

Income tax advocates argue that people would not adjust their savings habits substantially if the tax system were changed in this way. Policymakers in the United States addressed this issue by making changes to the tax code to offset the negative impact. Individual Retirement Accounts (IRAs) and 401(k) plans allow taxpayers to save aside a restricted amount of money that isn’t taxed until the money is withdrawn in retirement. People who save money in these accounts will be taxed on their consumption rather than their income if this scenario plays out.

  • It redistributes income in the economy

Accordingly, tax rules that encourage saving tend to have a greater impact on those with lower incomes than those with higher incomes. Because low-income families can’t afford to save and spend their entire income on necessities, a system like this lowers the tax burden on the wealthy while increasing the burden on the latter. A high VAT rate may widen the gap between the rich and the poor, increasing inequality in society in countries whose tax revenues rely on consumption taxes, such as a high VAT rate. The standard VAT rate in OECD countries in 2016 is shown in the following table. Hungary has the highest regular tax rate (27 percent), although this is more than offset by lower taxes on food and newly constructed homes, which benefit the poor and help families.

Rates and percentages of tax in OECD countries as of 2016.

Data comes from the OECD’s 2016 report on consumption tax trends.

  • It can alter price levels

Price levels can be affected by the implementation or adjustment of VAT rates, but the amount and duration of this effect are dependent on the design of the tax law as well the economic circumstances and reaction of financial players to such a change. Let’s take a look at an increase in VAT in a country as an example of this. The immediate effect of the change is certainly an increase in price levels of products that are subject of VAT; however, its inflationary effect may be mitigated if the seller doesn’t transfer such a cost entirely to the final customer. This can happen in industries where the rivalry is fierce or the consumer demand is more responsive to price fluctuations. To put it another way, the whole impact of the price depends on the price elasticity of demand. In addition, the government may enact a so-called price ceilings mechanism, which further dampens the price effect of price increases. However, even if a change in the VAT rate results in price changes, the effect is short-lived and has little impact on inflation.

  • Automatic stabilizer

Since government taxes, in general, derive from economic activity, their level depends heavily on the real Gross Domestic Product (GDP) (GDP). The value-added tax particularly moves in unison with economic production because of its consumption-based structure. When income grows, people spend more on goods and services so tax receipts inevitably increase. In other words, a percentage of the total income created in a country flows to the government depending on the economic activity: higher economic activity implies higher tax receipts and lower GDP means lower tax revenue. However, while consumption comprises a large percentage of GDP, most of this flows into the government, while a lesser amount flows back into the economy (as a type of consumption) and helps to economic growth. It follows that taxes can be seen as an automatic stabilizer since they safeguard the economy from overheating but also can stimulate economic activity when the production is lower than planned. Besides, the government can encourage consumption by cutting VAT rates; nevertheless, the effect of these policies are uncertain and barely long-lasting.

History of VAT

VAT is a relative newcomer to taxation, having only been in effect for a little over 60 years. Despite this, it has become one of the most important sources of revenue for governments.. Below is a list of nations that have enacted a VAT.

Voter-approved Value-Added Tax (VAT) Calculator for 2016

International – Overview of General Turnover Taxes and Tax Rates, 27 International VAT Monitor 2 (2016), Journals IBFD, F. Annacondia. International.

No one can agree on exactly when and where the VAT initially appeared, but theoretical research and discussion began in the United States and Germany in the 1920s. Economists at the time recommended the VAT as a way to raise large money for the government without affecting the allocation of resources in the free market system (Lindholm, 1980).

However, it was French tax official Maurice Lauré, who served as joint director of the French tax authority and is often regarded as the “founder” of VAT, who transformed German businessman Carl von Siemens’ proposal into a system. Since only wholesale transactions were covered, France was able to introduce the practise in 1954, making it the first country to do so. Côte d’Ivoire and Senegal became the first former French colonies to implement VAT in the early 1960s. The new tax didn’t get much attention at first. Only 10 countries incorporated VAT in their tax systems in the late 1960s. When the European Union expanded, VAT became a requirement for membership; thus, its worldwide success was a result of this. With considerable assistance from the IMF, the number of countries implementing VAT increased to over 140 by 1989, from the original 48 (mostly in Western Europe and Latin America). Currently, VAT is a hot topic since it is widely thought to be one of the most effective ways for the government to raise additional income. The VAT also has the advantage of being unaffected by foreign trade. As a result, it is at least partially protected from domestic fraud.