VAT Differences between Countries

Updated on May 14, 2022

VAT Calculator

The VAT Calculator is able to calculate a pre-VAT price, a VAT rate, or a post-VAT price that includes VAT. Enter two of the three possible values to get the third one.

Net Before VAT Price
VAT Rate
Final VAT Inclusive Price

 

RelatedSales Tax Calculator

What is VAT?

This tax is based on the amount of value added to a product or service during various supply chain stages, such as the production of a product, the wholesale distribution, or the supply of a product. VAT (value-added tax) is a form of indirect consumption tax. Governments all across the world rely on VAT as a major source of revenue, and it generates about 20% of all tax revenue. More than 160 countries impose this consumption tax, making it the most widespread in the world. Since the introduction of VAT in the 20th century, European VAT rates have steadily risen. This is because all EU countries are legally obligated to enforce a minimum VAT rate. A developed country that doesn’t apply VAT is the United States.

VAT Differences between Countries

Even while all countries adhere to a fundamental VAT blueprint, the particular details of its execution vary widely. When it comes to taxes, there is no one-size-fits-all solution. Certain goods and services, whether they’re imported or exported, as well as requirements for filing, payment (and penalties) differ from country to country. There are certain exceptions to this, such as a VAT exemption for senior citizens in the Philippines for personal use. Additionally, there is a lower VAT rate for certain products, such as books and oils, in China. Many countries do not charge VAT on a wide range of products and services, including education, food, medical care, and government fees.

GST

In some countries, such as Australia and Canada, a GST, or goods and services tax, can be used as a synonym for VAT, or Value Added Tax. As a result, the phrases are frequently used interchangeably (sometimes even with the term “sales tax”), despite the fact that the GST and VAT in their respective countries might differ greatly. GST and VAT do not exist in the same country.

Simplified Example of the Process of VAT

If you buy coffee from a local coffee shop where the beans were farmed and then roasted by another nearby roaster, you’ll have to pay VAT on the coffee you buy. Assume that the value added tax (VAT) is 10%. Each link in the value-added tax (VAT) chain must submit the required documents to the government.

First, the coffee beans are grown by a local farmer in the area. This means that the farmer earns $5.50 per pound of fresh coffee beans from a roaster who pays $5.00 per pound, plus the VAT of $0.50 ($5.00 x 10%), which means that the farmer receives $5.50 for each pound of coffee beans.
As part of the service, the roaster charges $10.00 per pound of freshly roasted coffee beans for their services. Retailers must pay $11.00 per pound, which includes the $10.00 roasting cost and a 10 percent VAT fee of $1.00. As a result, because the farmer has already paid $0.50 in taxes, the roaster owes the government only $0.50 in VAT.
Each pound of roasted coffee beans can be used to sell five cups of $4.00 coffee for a total of $20.00. The business owner collects $22.00 from consumers who buy his coffee, $20.00 from them and $2.00 from VAT for every five cups sold. A total of $1.00 has already been paid in VAT by farmers and roasters in previous transactions, therefore the shop owner simply has to pay the government $1.00.

VAT vs. Sales Tax

When you buy something, you have to pay a government tax on that purchase, which is known as a sales tax. It is not uncommon for the sales tax to be avoided at various points in the supply chain. The merchant only collects sales tax from customers at the last step of the transaction, when they are making purchases.

VAT is a bit more complicated than sales tax, as demonstrated in the example above. When a customer pays a vendor for a product, the seller must collect sales tax just once. In terms of avoiding tax fraud or malpractice, VAT is superior than sales tax because taxes are imposed continuously throughout the production and distribution process rather than only once at the end. VAT, on the other hand, is more expensive to administer than sales tax because of the extensive documentation required.

Despite the fact that VAT is applied numerous times to the same commodity or service, no double taxation occurs. A cascading impact is avoided since VAT is only levied on goods and services that have had value added to them (as shown in the example). Sales tax, on the other hand, can lead to double taxation.

Taxes like sales tax and VAT are similar in that they are generally represented as a percentage of the price. When it comes to VAT vs. sales tax, the typical rule is that retail sales tax rates fall somewhere between 4% and 10%. A common misconception about VAT is that it taxes businesses more to lower the tax burden on consumers; firms would simply raise prices to compensate. When it comes to tax revenue, even though there are changes in the frequency and timing of taxes, the end result is the same in most cases.

Because of VAT’s regressive character, lower-income earners are disproportionately affected by the tax. This can be mitigated, however, if progressive restrictions, such as those in Europe’s VAT system, are properly implemented

“Sales tax” and “VAT” are commonly used as synonyms in business contexts. Please visit the Sales Tax Calculator for more information or to perform sales tax calculations.