Updated on May 13, 2022
Table of contents:
- VAT definition
- What is the difference between VAT/GST and sales tax?
- What is the difference between VAT and GST?
- Margin and VAT procedure
- How to work out VAT
- When can VAT be refunded
- Value added tax in the United States
- Economic implications of the value-added tax
- History of VAT
This so-called “value-added tax” You can use a VAT calculator to figure out how much VAT you’ll have to pay and the total cost of the thing based on the product’s net worth. Our calculator can also help you add or subtract VAT from the net/gross amount. 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.
A consumption tax, value added tax (VAT) is also known as goods and services tax (GST) in some countries because it is levied on both commodities and services (Australia, Canada, New Zealand, and Singapore). A tax on “added value,” which is the product’s sale price after subtracting the cost of components and any other taxable inputs, is known as a “additional value tax” (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?
A multi-stage tax, VAT/GST applies to all stages of production of goods and services and is assessed based exclusively on the “added value” of each stage. In other words, only the “added value” that each participant in the manufacturing chain creates is subject to VAT. Until the product reaches its final destination – the customer – this process continues. Because he/she doesn’t produce any “added value,” he/she is ultimately responsible for the tax bill.
However, in contrast to this, the retail sales tax is a single-stage tax that is charged after a transaction is completed. In contrast to VAT, which is calculated several times, the fee is simply paid once.
The following table illustrates the difference between VAT and sales tax by using a basic example. It’s possible to imagine a lumberjack felling trees (free of charge) and selling the wood to a sawmill owner (enough for one barrel) for $100. The owner of the sawmill sells the oak staves to the cooper for $150 once they have been chopped into staves. Once the barrel is finished, the cooper sells it to the store for $300, who in turn sells it to the buyer for $350. The total VAT paid is $35, which is 10% of the sum of the values added at each stage of the process. The tax paid is the same in both cases, but only at the point of sale to the customer in the event of sales taxes with the same 10% rate.
Value Added to the Stage Product Price
Retail Sales Tax of 10%
1 log $100 $100 $10 \s2 stave
$150 $50 $5 \s3 barrel
$300 $150 $15 \s4 barrel
$350 $50 $5 $35
The sum of all taxes levied
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?
Though they are commonly used interchangeably, VAT and GST each have unique implementations that make them distinct. Both VAT and GST are based on the value added and are present at many stages of the transaction; however, the VAT procedure is linked to the production/distribution chain, in contrast to the GST which appears in the supply chain. To put it another way, VAT is linked to the time of sale, while GST is linked to the time of supply.
VAT is also a tax on the final consumption of goods and services that is totally paid by the consumer. GST, on the other hand, levies a single tax on the delivery of all goods and services together. There are credits available for input taxes paid at each stage, making GST a tax solely on value added at each stage. With set-off benefits at all earlier levels, the ultimate customer will only be responsible for the GST that is charged by the last dealer in the supply chain.
As a result, VAT is done offline, while GST is done entirely online, based solely on transaction data. Another difference between VAT and GST is that under VAT, the seller is responsible for collecting revenues, whereas under GST, the buyer is responsible for keeping track of them.
Another distinction between the two systems is the issue of double taxation, which is present in the VAT regime because the tax on excisable items may also be charged 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 method of VAT taxes for some businesses. This VAT technique allows enterprises to pay VAT on the profit margin they make from selling their products. It’s illegal for a seller to deduct VAT from the price of a product or service. You can use our gross margin calculator to get an idea of how much profit you’ll make. To utilise it with VAT, you can use the margin and VAT (it has nothing to do with the “VAT margin scheme”, though).
How to work out VAT
To calculate VAT, you need to:
- Determine the net price (VAT exclusive price). Let’s make it
- Find out the VAT rate. It will be
23%in our example. If expressed in percentages, divide it by
100. So it’s
23 / 100 = 0.23.
- To calculate the VAT amount: multiply the net amount by VAT rate.
€50 * 0.23 = €11.50.
- To determine the gross price: multiply the net price by VAT (again, we’d get
€11.50) rate and then:
- Add it to the VAT exclusive price so you get the VAT inclusive.
€50 + €11.50 = €61.50.
In essence, it’s just a specific kind of net to gross calculation. If you want to do it quickly, simply use our online VAT calculator.
When can VAT be refunded
In some cases, the VAT you’ve already paid may be refunded. These are some of the instances in which VAT (Value Added Tax) is paid in EU countries.
VAT paid in cross-border trades between EU nations is reimbursed to EU enterprises in the form of cross-border refunds.
Non-EU businesses can get their VAT back when transacting with EU countries; this is known as the VAT rebate.
You may be eligible for VAT refunds if you’re planning a trip to the European Union and plan to shop while you’re there.
On the following websites, you can learn about the VAT system and official instructions for calculating VAT refunds.
Value added tax in the United States
As a member of the Organization for Economic Co-operation and Development (OECD), the United States is the only OECD country 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. It now stands that just five of the United States’ 50 states do not impose any kind of sales tax.
A country’s history and economic structure are important factors in the evolution of its tax system. Continue reading to learn more about this topic in the section that follows.
Economic implications of the value-added tax
In 1798, Benjamin Franklin said, “The only things guaranteed in this world are death and taxes.” For centuries, taxation has been an inescapable part of daily life; according to Burg (2004), it was Ancient Egypt circa 2390 BC where the tax was first introduced and collected in the form of grain. 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. Since a large portion of the government’s revenue is derived from taxes, this move had a significant impact on our financial situation, making VATs a top political and economic priority.
The following graph depicts the percentage of total taxation in 2014 that was accounted for by value added tax (VAT).
The percentage of VAT collected in 2014, as calculated by the VAT Calculator.
Reported by the Organization for Economic Co-operation and Development (OECD).
Taxes can have different economic consequences depending on the theoretical approach and the type of tax. 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. A significant portion of the financial services industry feels that income tax has a significant impact on saving behaviour since it reduces disposable income (the portion of income that is available after taxation). To put it another way, saving isn’t affected by a consumption tax because it only comes into play when money is spent. 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. There would be an increase in production and living standards as a result of increased savings.
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 they withdraw it 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
Tax rules that encourage people to save also place a greater burden on those with lower incomes, which is directly related to the debate over saving behaviour. As a result, lower-income households prefer to spend all of their income on daily necessities, resulting in a decreased tax burden on the wealthy and an increase in taxes on the less fortunate. 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. VAT rates among OECD countries are shown in the graph below, as of 2016. Although Hungary has the highest standard rate (27 percent), lower rates are applied to food and newly built homes to help the poor and support families, which offsets the burden.
VAT Calculator – 2016 OECD countries’ typical VAT rate
Data comes from the OECD’s 2016 report on consumption taxes.
- 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 economic players to such a change. Let’s take a look at an increase in VAT in a country as an example of this. The shift will almost likely result in higher prices for VAT-registered goods, but the inflationary impact may be lessened if the vendor does not pass on the entire cost to the ultimate customer. This might happen in industries where there is a lot of competition between suppliers or when the demand from customers is particularly sensitive to price changes. To put it another way, the entire price effect is heavily reliant on demand’s price elasticity. In addition, the government may enact a so-called price ceilings policy, which further dampens the price effect of the price increase. A movement in VAT rates may lead to price changes, but the effect is short-lived and does not lead to a continuous rise in inflation.
- Automatic stabilizer
Because government taxes are derived from economic activity, the level of taxes levied is highly dependent on the real GDP (GDP). Because of its consumption-based nature, the value-added tax is closely linked to economic activity. Income increases lead to a rise in tax revenue because people spend more money on products and services. As a result, the government receives a percentage of the country’s overall economic output: higher GDP equals more tax money, and lower GDP means less tax revenue. In contrast, most of GDP’s spending goes to the government, while a lesser fraction (as a kind of consumption) flows back into the economy and helps to its growth. When the economy is overheating, taxes can operate as an automatic stabiliser because they prevent the economy from overheating, but they can also encourage economic activity when production is lower than planned. In addition, the government can encourage consumption by lowering VAT rates; however, the impact of these policies is uncertain and unlikely to continue for long.
History of VAT
According to other forms of taxes, VAT has only been around for about 60 years. Governments have embraced it as a major revenue generator, though. The number of nations with a VAT is shown in the following graph.
VAT Calculator – 2016 VAT Implementation Countries
International – Overview of General Taxes and Tax Rates, 27 International VAT Monitor 2 (2016), Journals IBFD.
Although no one can agree on exactly when and where the VAT originally appeared, much of the theoretical research and discussion had its start in the 1920s in the United States and Germany.. 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).
Carl von Siemens, a German industrialist, came up with the notion of a consumption-based VAT in the 1920s, but it was French tax official Maurice Lauré who developed it into a system and is acknowledged to be the ‘father’ of VAT. Because of this, France was the first country in 1954 to follow the practise, but it was done in a somewhat altered form, covering just wholesale transactions. Côte d’Ivoire, Senegal, and Brazil, all former French possessions, adopted the VAT soon after. At first, the new tax was mostly ignored. Only ten countries had adopted VAT into their tax systems by the late 1960s. As the EU expanded, so did its global popularity, and the adoption of VAT was one of the requirements for membership. The International Monetary Fund (IMF) was instrumental in bringing the number of nations implementing VAT from 48 in 1989 to more than 140 by the end of the decade. As a means of increasing tax collection, value-added tax (VAT) has become increasingly popular in recent years. The VAT also has the advantage of being unaffected by foreign trade. Aside from that, it’s somewhat protected against domestic fraud.