What is the difference between VAT and GST?

Updated on May 14, 2022

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This so-called “value-added tax” Using a VAT calculator, you can figure out how much VAT you’ll have to pay and how much the final product will cost you depending on its net value. Our calculator can also help you add or subtract VAT from the net/gross amount. Prior to utilising our online VAT calculator, you may want to spend some time learning about VAT, its history, how to manually calculate VAT, and the economic ramifications of VAT, among other things.

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). 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 type of consumption tax.

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

When it comes to products and services, VAT/GST is a “multi-stage tax” because it applies to all stages of production. 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. As long as he/she does not produce any “added value,” he/she is ultimately responsible for the tax bill.

The retail sales tax, on the other hand, is a single-stage tax that is collected at the time of the sale. As a result, unlike VAT, which must be paid many times, this fee is only charged once.

Here’s a handy table that illustrates the differences between VAT and sales tax with an actual example. Consider a scenario in which a sawmill owner pays $100 for a barrel of wood that a lumberjack cut down for free. The owner of the sawmill sells the oak staves to the cooper for $150 after they have been chopped into staves by the mill owner. 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 amount of VAT paid is $35, which is equal to 10% of the entire value contributed during the process. In the case of sales tax with the same 10% rate, the tax paid is same, but it is only assessed at the point of sale to the buyer.

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

There are two major ramifications of the VAT vs. sales tax distinction: VAT incurs higher administrative costs due to its broader application, but it is less noticeable to the final customer, making it potentially more politically advantageous (Wells and Slesher, 1999).

What is the difference between VAT and GST?

The terms value-added tax and goods and services tax (GST) are sometimes used interchangeably, but there are some important distinctions based on how they are put into practise. Both forms of taxes are present in numerous stages of transactions and are based on the value added; however, the VAT procedure is tied to the production/distribution chain, whereas the GST appears in the supply chain; GST, on the other hand, is linked to the point of supply, but VAT is not.

As an added benefit, VAT is a tax on final consumption that is totally borne by the final user of the product or service. GSTR is a single tax on the supply of goods and services, in contrast. 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. 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 may 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 method of VAT taxes for some businesses. On the other hand, this VAT procedure enables enterprises to pay VAT based on their profit margins on products sold. It’s illegal for a seller to deduct VAT from the price of a product or service. Using our gross margin calculator, you can determine your profit margin. 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 compute VAT, you must do the following:

Calculate the final cost (VAT exclusive price). Let’s go with €50 as our final decision-making threshold.
Find out the tax rate. In our hypothetical case, that percentage comes to 23%. Calculate the % by multiplying by 100. In other words, 23 out of 100 is equal to 0.23.
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.
Net price x VAT (again, €11.50) = gross price. Add that to the VAT-exclusive price to arrive at total price, which is €11.50. The sum of €50 and the additional €11.50 is equal to €61.50.
The net-to-gross conversion is all that it is, in the end. If you’re pressed for time, you may always utilise our VAT calculator.

When can VAT be refunded

The VAT paid can be refunded in certain situations. 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.
In the event that a company headquartered outside the EU transacts with another EU country, VAT can be refunded.
If you’re planning a trip to the EU, you should know that you may be able to recoup some of the VAT you paid while shopping.
The following websites provide information on the VAT process and official instructions for calculating a VAT refund:

Value added tax in the United States

No other member of the OECD (Organisation for Economic Cooperation and Development) country has implemented a national value added tax, despite VAT and GST being widely used around the world. Rather, sales taxes are imposed at the state (subnational) and local (substate) levels. It now stands that just five of the United States’ 50 states do not impose any kind of sales tax.

In addition to country-specific characteristics and historical context, tax systems evolve in tandem with a country’s economic structure. Continue reading to learn more about this topic in the section that follows.

Economic implications of the value-added tax

“In this world, nothing is certain but death and taxes,” Benjamin Franklin wrote in 1798. As Burg (2004) points out, the unsettling statement was not made in vain: taxation has been a part of everyday life from its inception in Ancient Egypt approximately 2390 BC; the levy was first collected in the form of grains. 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. As a major source of revenue for the government, VAT’s political and economic issues became paramount as a result of this change in the tax code.

It’s easy to see how the percentage of overall taxation accounted for by VAT varies by country.

Use our VAT Calculator to see what proportion of your income is subject to the value-added tax in 2014.

The OECD’s 2016 Revenue Statistics provides this information.

Depending on the theoretical approach and the form of tax, the economic effects of taxes might vary. Changes in the VAT structure, whether in scope or tax rate, can affect the economy as a whole in a variety of ways.

  • It may affect saving behavior

Economists typically dispute on the implications of varied tax loads, as is evident in a wide range of economic concerns. There are a number of hotly debated issues, including income tax and consumption 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). But a consumption tax only kicks in after money has been spent, so it has no effect on people’s 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 personal income taxes than in Europe, where consumption taxes account for the majority of government revenues. There have been a number of initiatives to alter the US tax system toward consumption-based taxation, which advocates claim would encourage individuals to save more. 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. American lawmakers responded to this worry by adjusting the income tax legislation to compensate for such a negative impact.. In order to avoid paying taxes on money saved in a specific savings account (such as Individual Retirement Accounts and 401(k) plans), taxpayers can set aside a certain amount. Taxes would be based on consumption rather than income if these accounts were used by those who saved via them.

  • 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. 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 forcing the government to raise taxes 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. In 2016, the standard VAT rate in OECD countries was shown in the graph below. 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.

OECD countries’ 2016 VAT standard rate can be found using our VAT Calculator.

Consumer Tax Trends (2016), OECD, is the source.

  • It can alter price levels

Pricing can be affected by changes in VAT rates, but how much and how long they persist depends not just on the tax law’s design, but also on economic conditions and economic players’ reactions to such a change. Consider a country’s increased VAT rate to better understand 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. In industries where competition is fierce or customer demand is particularly sensitive to price fluctuations, such a situation may arise. 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 mechanism, which further dampens the price effect of raising prices. A change in the VAT rate may cause price changes, but this effect is short-lived and does not lead to an increase in inflation rates that lasts for long.

  • Automatic stabilizer

Taxes are often derived from economic activity, hence their amount is largely determined by the real GDP of the country (GDP). Because it is dependent on consumer purchases, the value-added tax moves in lockstep with economic output. People’s willingness to pay more in taxes increases in direct proportion to their rising standard of living. 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. Consumption is a large percentage of GDP, but the government receives most of it, while a smaller fraction returns to the economy (as consumption) and contributes to the growth of the economy. When the economy is overheating, taxes can operate as an automatic stabiliser because they prevent the economy from overheating, but they can also boost economic activity when production is lower than projected. The government can also promote consumption by lowering VAT rates, although these policies have a limited impact and are not likely to persist long.

History of VAT

Although it has been in use for more than 60 years, VAT is a relatively new tax structure. As a result, governments are increasingly relying on it as a major source of revenue. The number of nations with a VAT is shown in the following graph.

The following nations have implemented VAT in 2016:

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

The exact date and location of the VAT’s initial appearance are unknown, however most theoretical research and discussion took place in the United States and Germany in the 1920s. economists suggested VAT as a way to raise significant amounts of money for the government without affecting the way resources are allocated in a free market (Lindholm, 1980).

While German businessman Carl von Siemens came up with a notion for a consumption-based VAT in the 1920s, it was French tax official Maurice Lauré who developed it into a system and is acknowledged to be the “father” of VAT, according to the International Monetary Fund. As a result, France was the first country to apply the practise in 1954, however it was executed in a somewhat different manner as it only covered wholesale transactions. In the following years, the VAT was also implemented in the former French possessions of Côte d’Ivoire and Senegal, and in Brazil in 1965. The introduction of a new tax was initially met with scepticism. Only 10 countries incorporated VAT in their tax systems in the late 1960s. Due to the EU’s rapid growth, the adoption of VAT was a requirement for new member countries. 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). The current popularity of VAT can be attributed to the belief that it is one of the most effective ways to raise income for the government. The VAT also has the advantage of being unaffected by foreign trade. Furthermore, it is protected from domestic fraud to a certain level.