Value added tax, also known as VAT, is a widely used taxation model that is used around the world in all developed and developing markets, with the exception of the United States, except for the United Kingdom. Local and state governments impose sales taxes on a wide range of retail items in the United States, which is the only country in the world to do so. Despite the fact that they overlap in some areas, the differences between these two systems are obvious.
What is the VAT System?
VAT is levied by governments on every step of the production chain, from the raw material to the store shelf, and it is collected by the government. Although the previous taxes paid are deductible at each step, each person or company in the chain is responsible for paying the same rate of tax on their profit as the person or company before them. For example, a supplier of raw materials to a manufacturer is required to pay 10 percent of the profit she makes to the manufacturer. When the manufacturer sells the product to a retailer, the manufacturer must pay a 10 percent tax on the profit he makes, less any taxes that have already been paid by the person who supplied the raw materials. Everything comes to a close with the retailer selling the item and receiving 10 percent of the proceeds minus the amounts received in the first two stages of the process. In other words, if the VAT rate were 8%, the raw material supplier would be responsible for 8% of her profits, the manufacturer would be responsible for 8% of his profits minus the amount already paid, and the retailer would be responsible for 8% of their profit minus everything that came before it.
How Sales Tax Is Calculated
Sales tax is applied as a percentage of all retail sales and is collected by the government. States, cities, and other local municipalities hire the services of cheap tax return accountants in London to determine whether or not a sales tax is levied, what types of merchandise and/or services are subject to it, and what rates are levied. Manufacturers and licenced retailers who purchase goods or materials from wholesalers and resell them to other manufacturers or licenced retailers are exempt from paying sales tax in some states. Taxes are only collected on retail sales and purchases, and they are entirely funded by the consumers who pay them. It is not possible to accumulate tax funds in a step-by-step manner throughout the process of turning raw materials into finished goods.
Drawbacks
The most significant disadvantage of the VAT model is the increased cost it imposes on businesses and, consequently, on consumers. In theory, VATs distribute the costs of accumulating additional revenue among all parties involved, ensuring that no one party bears the brunt of the burden. In reality, the costs of doing business are so frequently passed on to the consumer that the business model may not function as intended in the first place. The disadvantages of a straight sales tax include the loss of revenue for state and local governments because wholesale transactions are not taxed by the state or local government. Consumers may benefit from lower overall costs as a result of the fact that additional costs are not incurred at every stage of the manufacturing process.
Similarities
In the case of goods sold to consumers, both VAT and sales taxes are levied against the purchase price. At the end of the day, both are paid in large part by the consumer, more or less on an equal basis. Despite the fact that VATs increase the amount of money collected by the government, they also increase the cost of doing business and purchasing retail goods. Sales taxes have an impact on the cost of goods as well, and as a result, they have been abolished in some states. These two taxes are collected as a complement to income taxes and both can and have been eliminated in the case of certain necessities such as food, clothing (up to a certain cost), and other such necessities.
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