Types of Value Added Tax (VAT)

Updated on May 23, 2022

Assets are subject to a VAT when they are purchased for less than their market value. According to a company’s treatment of capital goods, the various categories of VAT are determined. The essential issue in the study of VAT types is whether or not input tax paid on capital items is acceptable. Value-added tax (VAT) is levied at every stage of the production and distribution process. The value-added tax (VAT) is a tax levied on the sale of products rather than the income of the taxpayer.

In the United States, there are three kinds of VAT:

Type of intake

Type of income

Type of gross national product

(i) Consumption Type VAT

Basically, it’s a tax on how much people spend on things like food, clothing, and other necessities. Consumption type VAT excludes from the tax base any capital assets purchased from other businesses in the year of purchase and does not deduct depreciation in following years. These taxes are levied on the amount of money consumers spend on goods and services.

(ii) Income Type VAT

Types of people that make money Capital goods purchased from other companies are not exempt from VAT in the year of acquisition. This type, on the other hand, does not include future depreciation in the tax base. Consumption and net investment are both subject to the tax. The net national income serves as the basis for this sort of tax.

(iii) GNP Type VAT

Under this kind, capital goods purchased by a firm from other firms are not deducted from the tax base in the year of purchase. It also does not allow the deduction of depreciation from the tax base in following years. Tax is applied both on consumption and gross investment. The tax base of this type is the gross domestic product.

Consumption type VAT is extensively used. So, by the term ‘VAT’ we really mean the consumption type VAT.