The system of taxes is practised in almost every country in the world. The most common reason is to generate revenues for the expenditures of the government. Different types of taxation exist with their rates and each has its way of financing the government.
Some taxes are imposed on individuals and some are imposed on goods. Taxes may be levied on federal level, local and state level. It is important to understand the difference between various types of taxes to understand the infrastructure of our country. Two of the types of taxes imposed on goods are VAT and excise duty.
VAT vs Excise Duty
The difference between VAT and excise duty is that value-added tax (VAT) is the tax on goods when the value is added to it as it moves from the production stage to the final stage of reaching the market.
Excise duty is the tax added to the manufacturing of goods. It is imposed at the time of manufacturing and not at the time of sale unlike VAT. Their difference is best understood by this example here. If a company is making soap and you buy it, you are also paying VAT apart from its original price.
When the company is making soap, then after it is made it has to pay excise duty even before selling the soap. The other features that differentiate between VAT and excise duty are shown in the comparison table below.
Comparison Table Between VAT and Excise Duty (in Tabular Form)
|Parameter of Comparison||VAT||Excise Duty|
|Definition||Tax added on goods as it travels from the point of production to the point of sale.||Tax added on the manufacturing of stocks.|
|Imposed||After the product has entered the final stage of selling.||After the product has been manufactured.|
|Paid by||Customers who buy the product.||The company who is manufacturing the product.|
|Implementation||Method of collection and timing of collection.||Ad valorem and specific.|
|Examples||Biscuits, candy, soap, toothpaste, shoes.||Tobacco, alcohol, fuel.|
What is VAT?
VAT stands for value added tax. It is the amount of cost added to the product after it has reached the final stage of trading. VAT system is exercised in over 160 countries around the world. The primary purpose that value added tax serves is that it generates revenues for the government from all sorts of goods whether they are online or offline.
The customer only needs to pay VAT for the end product and not for the raw materials that were needed to manufacture the product. The company has already paid VAT for getting the raw materials and so covers the cost by adding it to the price of the product to compensate it.
Some people criticize the VAT system on certain accounts. According to them, this system would only benefit wealthy families and the low-income families would face problem paying these taxes.
The tax rate is decided as a percentage on the end product by the state. It is implemented in two ways:
- Method of collection
- Timing of collection
In the method of collection, the seller sends the buyer an invoice that has the amount of tax in it. The other way is that no specific invoice is generated and it is calculated on the value added to the product. In the timing of collection, a deposit is made on the payment of the goods and the tax is recorded according to the fund receipts.
What is Excise Duty?
Excise duty is the amount of tax added at the time of manufacturing of the goods. Customers may not get to see this amount directly as the company needs to pay them to the excise departments according to the government’s infrastructure.
As a result, the manufacturers increase the price of the end products to accommodate that cost. It is a business tax that the companies need to pay apart from other taxes like income tax. The government also generates a small amount of revenue from excise duties. It is imposed on specific goods like tobacco, alcohol and fuel.
It is implemented in one of the two ways:
- Ad valorem
In ad valorem, there is a fixed percentage of certain types of goods. Specific amount is applied to purchases that have a high social cost like airline tickets, cigarettes and alcohol. Specific excise taxes, like its name, add a specific amount of fees to the product such as on cruise ship passengers, gasoline and beer.
Main Differences Between VAT and Excise Duty
Some of the features that differentiate between VAT and excise duty are given below:
- VAT is the tax added on goods as it moves from the initial stage of manufacturing to the point of sale while excise duty is the tax added on the manufacturing of goods.
- VAT is imposed after the product has reached the final stage of selling while excise duty is imposed right after the product has been manufactured.
- VAT is paid by the consumers who buy the product whereas excise duty is paid by the company who is making the product.
- VAT implementation is carried out by the method of collection and the timing of collection. Excise duty implementation is carried out by the ad valorem method and the specific method.
- Examples of VAT goods include biscuits, candy, soap and toothpaste, shoes while examples of excise duty goods include tobacco, alcohol, airline tickets and motor fuel.
Having a sound knowledge about the different types of taxes and their working principles also proves useful when you are about to establish your business. Each country may have its own set of rules for these taxes according to their government infrastructure.
The government uses this money to fund public services and to maintain the economy of the people living in their country. Individuals or corporations who do not pay their taxes are punishable by law and is called tax evasion. So the payment of taxes is compulsory for them.