The endogenous growth in developing a country’s economy is through tax. Economic growth prediction can be made 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 on 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 on non-payers too.
Taxes are levied in different forms for different aspects. It not only aids the economy but also makes the consumer aware that usage of specific goods and services may also incur tax apart from the other taxes he pays annually.
The prominent tax structures VAT and Sales Tax have existed in the world for a long time ago. While both are applied to goods and services, they have a few differences between them.
Key Takeaways
- VAT (Value Added Tax) is an indirect tax levied on the value added at each stage of the production and distribution process. In contrast, sales tax is an indirect tax imposed on the final sale of goods and services to consumers.
- VAT aims to eliminate the cascading effect of taxation by allowing businesses to claim input tax credits for taxes paid on purchases. In contrast, sales tax is levied only on the final consumer without any input tax credit mechanism.
- VAT and sales tax are consumption-based taxes, but VAT is considered more efficient and transparent due to its input tax credit mechanism and the taxation of value addition at each stage.
VAT vs Sales Tax
State governments apply sales taxes on retail purchases of products and services that aren’t exempt from paying taxes. Only the final buyer pays the sale tax. While a value-added tax (VAT) is a sort of consumption tax that is imposed on products as they go through the production processes.
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Comparison Table
| Parameter of Comparison | VAT | Sales Tax |
|---|---|---|
| Meaning/Definition | VAT is the tax charged at every level of 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 Tax | VAT is a multi-staged taxation system. | Sales tax is a single-stage taxation system. |
| Evasion of tax | It is not possible. | It is possible in certain circumstances. |
| Tax Levied on | Value-added to the product at every stage of production. | The total value of the product or the service. |
| Burden of Tax | VAT is rationalized completely. | The burden of tax ultimately 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 production level whenever a value is added.
VAT is a type of tax that the consumer pays 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 permanently exempted from VAT. It is good to note that the amount of money the consumer pays to buy the product or the service minus the cost of the materials required to make the product is all taxed.
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 as the income tax.
Lower-income taxpayers have difficulty in the longer run. It is a cascading tax that it cumulates at every stage.
VAT is entirely independent of the taxpayer’s income as it is charged only on the product or the service utilized. Though income tax is more for income earners, VAT is charged equally for all products and services.
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 ultimately.
It is a consumption tax the government imposes on selling any goods and services. The 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 to help them evade sales tax.
Economists have researched the taxation systems and have identified that Sales taxes are the least harmful to economic growth as the sales tax percentage will not change concerning 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.
Main Differences Between VAT and Sales Tax
- 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 product value at the point of sale.
- VAT is a multi-staged taxation system, cascading at every level, while Sales tax is a single-point tax-paying system.
- VAT can not be evaded. However, sales tax can be evaded through various legal means.
- VAT is the Tax levied on the value added to the product, while Sales tax is the tax levied on the product’s overall value.
- VAT’s burden is distributed among entities from the manufacturing unit to the end user, while Sales tax is supposed to pay only by the end user.
- https://www.sciencedirect.com/science/article/pii/S0047272706001708
- https://ideas.repec.org/b/aei/rpbook/725195.html
- https://digitalcommons.wayne.edu/cgi/viewcontent.cgi?article=1358&context=lawfrp
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
