Updated on June 1, 2022
The Value-Added Tax (VAT) Calculator can determine a price before VAT, a VAT rate, or a price that is VAT inclusive. Enter values for two out of the three available inputs to compute the third value.
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. The United States is the only developed country in the world that does not have a VAT system.
VAT Differences between Countries
Even while all countries adhere to a fundamental VAT plan, the particular details of its execution varied greatly. When it comes to taxes, there is no one-size-fits-all solution. For example, taxes levied on specific commodities or services vary widely between countries, as do regulations for submitting, paying, and penalising tax returns. Most products and services purchased for personal use in the Philippines are exempt from VAT for older persons. There is a reduced VAT rate in China for specific products, such as books and oils, in addition to the usual rate. Education, commodities, healthcare, and government fees are just a few of the items that are exempt from VAT in many nations.
In certain countries, such as Australia and Canada, a GST, or goods and services tax, is used as an alternative to VAT. 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 a 10% tax rate. All parties in the supply chain must submit VAT paperwork to the government.
Fresh coffee beans begin their journey from a farmer in your neighbourhood. The farmer obtains $5.50 from the roaster for each pound of fresh coffee beans if the roaster pays $5.00 for the beans and the VAT of $0.50 ($5.00 x 10%) is applied.
It costs $10.00 to roast a pound of coffee beans, which is what the roaster charges the coffee shop owner. To put it another way, the shop owner must pay $11.00 per pound for the roasted coffee beans, $10.00 for the coffee itself, and 10% VAT, which is $1.00. As a result, the roaster only pays the government $0.50 in VAT because the farmer paid the first $0.50 to the government.
Each pound of roasted coffee beans can be used to sell five cups of coffee at $4.00 each, totaling $20.00 for the coffee shop owner. Every time a customer buys a cup of coffee, the shop owner gets a total of $22.00, which includes the $20.00 he gets from the customer and the $2.00 VAT. As a result, the shop owner only pays $1.00 to the government because the farmer and roaster have already paid $1.00 in VAT to the government.
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. In most cases, no sales tax is collected at any point along the way. Customers pay sales tax only at the end when they buy anything from the merchant.
VAT is a bit more complicated than sales tax, as demonstrated in the example above. When a customer pays the vendor for a product, the vendor collects sales tax. In terms of avoiding tax fraud or malpractice, VAT is superior to sales tax because taxes are imposed continuously throughout the production and distribution process rather than just once. Due to its complex paperwork requirements, however, VAT is more expensive to administer than sales tax.
Despite the fact that VAT is applied numerous times to the same commodity or service, no double taxation occurs. Because VAT is only charged on any value added, previous taxes can be subtracted, avoiding a cascade effect from occurring (as shown in the example). Sales tax, on the other hand, can result in double taxation.
Both sales tax and VAT are calculated as a percentage of the purchase price. Retail sales taxes range from 4-10 percent, but VAT rates range from 14-25 percent. A common misconception about VAT is that it taxes businesses more to lower the tax burden on consumers; in reality, businesses would simply raise their prices to compensate. Even though there are significant variances in the frequency and timing of taxes, the overall amount of tax money collected stays the same.
A result of VAT’s regressive nature is that it disproportionately burdens lower-income individuals. However, appropriate application of progressive legislation, such as in European VAT models, can counteract this.
“VAT” and “sales tax” are frequently used interchangeably. Visit the Sales Tax Calculator to learn more or to perform calculations concerning sales tax.