Value-Added Tax (VAT) Examples

Updated on May 14, 2022

At every point where value has been added, a value-added tax (VAT) has to be paid, which is a consumption tax. As a result, taxes are levied at each stage of the supply chain: when a manufacturer purchases a raw material, when that manufacturer turns around and sells its finished product to an end user, when the end user sells it to a retailer, and ultimately when the latter sells it to a customer.

The VAT is ultimately borne by the retail customer. The succeeding buyer in the chain reimburses the buyer in the earlier stages of the product’s manufacture for the VAT. In Europe, VAT (Value Added Tax) is widely used. The United States does not have a VAT. 1

Percentage rates for value-added tax (VAT) are often used. Consumers must pay the merchant $115 if a product costs $100 and a 15% VAT applies. While the merchant retains $100, he must remit $15 to the IRS as a tax payment.

IMPORTANT THOUGHTS
From the sale of raw materials through the ultimate purchase by a consumer, a product’s value-added tax (VAT) is paid at every stage of manufacturing.
The prior buyer in the chain is reimbursed for each assessment. As a result, the consumer is ultimately responsible for the tax.
Customers with lesser incomes, say their critics, should not be forced to pay more in VAT than those who are better off.
Supporters think it will help to prevent tax evasion by keeping track of all taxes paid on each purchase.

VAT vs. Sales Tax

As a result, many people mistakenly believe that VATs are national sales taxes. However, a consumer’s final site of purchase is where a sales tax is collected only once. As a result, it is only ever paid by the retail client.

A finished product’s VAT is collected at various points throughout the manufacturing process. A sale is made and a tax is collected and sent to the government each time value is added. 2

Example of VAT

There are numerous ways in which this could be done, but here are a few:

The raw materials for electronic components are purchased from a merchant that has access to a wide variety of metals. At this point in the production process, the metals dealer is the one who sells the product. The dealer bills the manufacturer $1 plus a VAT of 10%, which it subsequently remits to the government.

In order to make electrical components, the firm uses the raw materials, which it then sells to a cell phone manufacturer for $2 plus a 20 cent VAT. Rather than handing the government 10 cents, the producer keeps the other 10 cents, which it uses to pay back the metals dealer for the VAT it previously paid.

The maker of mobile phones adds value by producing the devices, which it then sells to a merchant for $3 plus a 30-cent VAT. There is a 10% tax on this product. The remaining 20 cents are used to repay the manufacturer of electronic components for the VAT it has paid to the phone manufacturer.

Final price: $5 plus 50 cents VAT, 20 cents of which goes to the government and the rest goes to the retailer as a rebate for VAT it previously paid.

The seller’s worth is represented by the VAT paid at each sale point along the way, which is 10% of the total value.

The VAT in the United Kingdom

Since 2011, the standard VAT rate in the United Kingdom has been 20%. 3

Certain purchases, such as child safety seats and home energy, are subject to a 5 percent tax. Food and children’s clothing, for example, are exempt from VAT. Transactions involving money and real estate are likewise exempt from the tax. 4

Arguments in Favor of VAT

People who believe in the value-added tax system claim that it discourages people from trying to avoid paying taxes. At each stage of production, VAT is levied (and documented) and serves as a deterrent to operating in the underground market. 2

A manufacturer or supplier can only be reimbursed for the VAT paid on their inputs if they also collect VAT on their outputs.

In order to get a credit for the VAT they had to pay while purchasing their items wholesale, retail enterprises have an incentive to collect the tax from their customers.

2

Better Than a Hidden Tax

Compared to so-called hidden taxes, a VAT is preferable. The taxes on gasoline and alcoholic beverages, for example, are examples of unaddressed consumption taxes. Surcharges on top of sales taxes are not itemised in the United States. 56

Compared to income taxes, VATs have a lower impact on individual economic decisions because they are levied at the same percentage on many or most products and services.

A country’s economy, however, can be affected by it. Government deficits can be eliminated and GDP growth accelerated through the implementation of a value-added tax (VAT).

Arguments Against VAT

VAT critics claim that it unfairly burdens the poor.

With a VAT, consumers regardless of income pay the same percentage of tax, as opposed to the U.S. system’s progressive income tax, which charges higher-earning individuals a higher tax rate.

VAT in the United Kingdom, for example, has a significant impact on the budget of those who earn less money.

Most nations with VAT, notably Canada and the UK, give exemptions or discounts on necessities like children’s clothing and groceries in an attempt to decrease this income inequality.

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VAT critics claim that it unfairly burdens the poor.

With a VAT, consumers regardless of income pay the same percentage of tax, as opposed to the U.S. system’s progressive income tax, which charges higher-earning individuals a higher tax rate.

VAT in the United Kingdom, for example, has a significant impact on the budget of those who earn less money.

Most nations with VAT, notably Canada and the UK, give exemptions or discounts on necessities like children’s clothing and groceries in an attempt to decrease this income inequality.

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