VAT vs Sales Tax | Sales Tax vs Value Added Tax
It is a commonly known fact that for any goods or services purchased a component of tax needs to be paid. Sales tax and VAT (value added tax) are consumption taxes, which are taxes that are charged when a consumer spends on purchasing goods and services. Sales tax and VAT are similar to each other in that they are both charged on the money that is used up for consumption purposes. Sales tax and VAT are usually perceived to be the same, and this article attempts to point out clearly the differences between these two forms of tax.
What is value added tax (VAT)?
Value added tax is an indirect tax levied on a product, and tax must be paid at every point in which value is added to the product, throughout its manufacture up until the product is sold. The tax will depend of the amount of value that is added to a product at each stage of the production process. VAT applies to almost all goods and services, and directly affects the producer of the product more than it does the consumer. For example, in the production of a chocolate bar, tax will be paid by the entity that grows and processes the cocoa beans, by the factory that adds the required ingredients into the processed cocoa to make chocolate bars and by the firm that provides the packaging for the finished product. The cost that was incurred at all stages of the production process will be included in the prices that are charged by the firm for the sale of the chocolate bars.
What is sales tax?
Sales tax is passed on at the point at which the product is sold to the final consumer. The cost of the sales tax will be directly felt by the consumer, as the amount of tax charged is clearly made known. For example, if the sales tax for a bar of chocolate sold is 4%, the cost of a chocolate bar that is $3 will cost $3.12 with the sales tax. Sales taxes are perceived to be healthy for an economy in the sense that it helps increase growth prospects for the economy, and results in more spending by the government in order to stimulate this growth. Some customers may attempt to avoid the payment of these taxes through purchasing goods on the internet, or through purchasing goods by other non taxable means.
What is the difference between Sales tax and VAT?
The imposition of the sales tax or value added tax both increase the cost of the product to the final consumer, directly as for sales tax and indirectly as for value added tax. Both forms of tax impose a burden on the final consumer, even though VAT is only borne by the producers and manufacturers in the production process. VAT is paid at every point in which new additions are made to the product’s value, whereas sales tax is passed on the customer at the time the purchase is made. VAT is paid for almost all goods and services, even though sales tax can be easily avoided by purchasing goods online; such an escape is not available for VAT. Sales tax is one of the main forms of government income and can be easily charged to consumers, whereas VAT cannot be easily imposed on developing countries that have lower income levels.
Sales tax and VAT
• VAT and sales tax both impose burdens on the final customer through the increment of prices of products sold.
• VAT is charged at every point in which the product is improved in value; hence it is referred to as ‘value added’, but sales tax is imposed on the final price of the product and is borne solely by the end customer unlike VAT, which is passed onto producers, as well as customers.
• VAT can be a harmful to economic growth as it may deter production levels, whereas sales tax is known to stimulate economic growth through heightened government spending.