Value Added Taxes

Value Added Taxes

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.

The purpose of VAT is to incentivise the production of critical resources required to sustain an economy, in the form of VAT-exempt goods. In the absence of VAT, an economy may tend towards production of services that can not sustain it - ie. if all farmers became lawyers, everyone would starve. VAT also incentivises businesses to spend on expanding their operations, as much of the expenditure on expansion can be deducted from the VAT payable to the revenue service.

The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.