Difference Between VAT and Sales Tax (With Table)

VAT vs Sales Tax

The endogenous growth in the development of a country’s economy is through tax. The prediction of economic growth can be done through taxation policies well in advance.

Keeping this in mind, financial experts in every country shall introduce new taxation policies every year. This decision is taken by the growth and capacity of the people to pay the tax.

At times, taxation policies and interim alterations can affect economic growth drastically. This requires a plan B as well or balanced methods that do not affect the progression.

The global truth is, tax systems are aimed at public expenditures. Tax-paying compliance, if followed by the citizens promptly can also reduce the penalties levied from non-payers too.

Taxes are levied in different forms for different aspects. It not only aides the economy but also makes the consumer aware that usage of certain goods and services may also incur tax apart from the other taxes he pays annually.

The prominent tax structures VAT and Sales Tax came into existence in the world a long time back. While both are applied to goods and services, they have a few differences between them.

The main difference between VAT and Sales tax is the application of the tax on the commodity, VAT is the tax charged at every level of the production and also distribution whenever a value is added to it while Sales tax is the tax charged on the total value of the product when the sale takes place.


Parameter of ComparisonVATSales Tax
Meaning/DefinitionVAT is the tax charged at every level of the production and distribution whenever a value s added.Sales Tax is the tax charged on the total value of the product at the point of sale.
Nature of TaxVAT is a multi-staged taxation system.Sales tax is a single-stage taxation system.
Evasion of taxIt is not possible.It is possible in certain circumstances.
Tax Levied onValue-added to the product at every stage of production.The total value of the product or the service.
Burden of TaxVAT is rationalized completely.The burden of tax completely falls on the consumer.

 

What is VAT?

VAT, abbreviated as Value added tax is a multi-staged taxation system. VAT is the tax charged at every level of production whenever a value is added.

VAT is a type of tax that the consumer pays for which is incremented at every stage of the production of that product. VAT compensates for the shared services.

Not all places VAT can be charged, and exports are always exempted from VAT. It is good to note that the amount of money paid by the consumer to buy the product or the service minus the cost of the materials required to make the product is all levied as tax.

VAT is available in more than 160 countries in the world. Though VAT has mixed opinions from various sectors, it is a standardized model that does not affect the consumer so much than the income tax

Lower-income taxpayers have difficulty in the longer run. It is a cascading tax where it cumulates at every stage. VAT is completely independent of the taxpayer’s income as it is charged only on the product or the service utilized. Though income tax is more for more income earners, VAT is charged equally for all the products and services.

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VAT 1
VAT
 

What is Sales Tax?

Sales Tax is a type of tax charged on the total value of the product at the point of sale. The tax is levied from the consumer completely.

It is indeed a consumption tax imposed by the government on the sale of any goods and services. Sales tax collection formula is simple, the consumer buys the product, the retailer collects it and pays it to the government.

Every business is liable for sales tax. The sales tax is charged on the total value of the product.

On the contrary, VAT is added to the product at every stage. This adds to the cost of the product and the value changes for which the sales tax is collected too.

There are different types of sales tax available in the country. The sale of products incurs sales tax, but the sale to businesses may have an intermediary who issues a resale certificate which can help him evade sales tax.

The economists have researched through the taxation systems and have identified that Sales taxes are least harmful to economic growth. As the sales tax percentage will not change wit respect to the person’s income or profit. 

Sales taxes are considered regressive in the economic development of a nation. And it is also proved that any regressive effect can be easily mitigated too.

Sales
Sales Tax

Main Differences Between VAT and Sales Tax

  1. VAT and Sales tax are prominent taxes in developed nations. The main difference between VAT and Sales Tax is the application of tax, VAT is the tax charged at every level of production of a product and it is cascading however Sales tax is charged on the total value of the product at the point of sale.
  2. VAT is a multi-staged taxation system and it is cascading at every level while Sales tax is a single point tax-paying system.
  3. VAT can not be evaded however sales tax can be evaded through various legal means.
  4. VAT is the Tax levied on the value-added to the product while Sales tax is the tax levied on the overall value of the product.
  5. VAT’s burden is distributed among entities right from the manufacturing unit to the end-user while Sales tax is supposed to pay only by the end-user.

 

Infographic

VAT vs Sales Tax

 

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Conclusion

VAT and Sales tax arguably good taxation policies. It is to be noted that, there are chances where tax can be charged for taxes itself and it increase the commodities price. Though sales tax has less harm to the economic growth of the country, VAT can create havoc on low-income taxpayers.

They may not buy the product as the price is high and on top of it, sales tax is added to the VAT. Further, these two taxes do not have any dependence on a person’s wealth or income, and most of the time the rates are unchanged. But the continuous purchase of the necessities may create disharmony in people’s lives.


 

Word Cloud for Difference Between VAT and Sales Tax

The following is a collection of the most used terms in this article on VAT and Sales Tax. This should help in recalling related terms as used in this article at a later stage for you.

Difference Between VAT and Sales
Word Cloud for VAT and Sales Tax

 

References

  1. https://www.sciencedirect.com/science/article/pii/S0047272706001708
  2. https://ideas.repec.org/b/aei/rpbook/725195.html
  3. https://digitalcommons.wayne.edu/cgi/viewcontent.cgi?article=1358&context=lawfrp
  4. https://www.elibrary.imf.org/abstract/IMF071/07173-9781589060265/07173-9781589060265/back.xml?lang=en

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