Difference between Value Added Tax (VAT) and Sales Tax

 

 

Often referred to as the “goods and service tax”, the Value Added Tax is distinctly different from the sales tax levied on exchanges. The Value Added Tax is a form of indirect tax that is imposed at different stages of production on goods and services. VAT is levied on the import goods as well and the same rate is maintained as that of the local produce. Most of the European and non-European countries have adopted this system of taxation. The transparent and neutral nature of taxation has prompted VAT to emerge as one of the robust revenue raisers in these countries.

Sales tax, as compared to VAT is the percentage of revenue imposed on the retail sale of goods. Unlike VAT, sales tax is levied on the total value of goods and services purchased.

The value added tax system, unlike the conventional sales tax system, efficiently addresses the problems of cascading and input tax credit that causes an automatic hike in the consumer price level. The incidence of cascading is avoided in VAT as the tax is imposed on the value addition at every stage of production. The final consumers are the ultimate bearers of the burden. This indirect yet coherent form of taxation involves transparency and is therefore easily comprehensible. Understanding the differences and details of these two different approach can be challenging. You may require help with taxes from accountants or tax professionals.

The economic effect of VAT falls on the final prices of the goods and services while sales tax relies on the final sale to the customers. The value added tax system requires an effective accounting. To deal with this disadvantage, the same tax is charged to each member involved in the production of the goods and services. The implementation of the tax remains indifferent to the position of the member in the production cycle or its position with respect to the customers.

The system of taxation under VAT is also successful in avoiding tax evasions that is frequent in sales tax. Sales tax is often considered a burden if the percentage charged goes beyond 10% and is subjected to evasion by the consumers who engage in buying products through the internet and other activities such as buying at wholesale or through an employer. Although tax evasion is not possible in VAT, it is subjected to other fraudulent practices such as carousel fraud. This is one of the prominent practices of theft of the value added tax. It is prevalent in the nations where the movement of goods between jurisdictions is exempt from VAT. The fraudster is often found levying VAT on products and evading its payment to the government. Such practices are a heavy loss of tax incomes for the governments.

VAT is one of the newest instruments of the global economy and is widely accepted and implemented in most of the nations. However, VAT poses constraints in developing countries such as India. The predominance of low per capita income in these nations poses a difficulty for the governments to earn revenue through income tax. As compared to VAT, sales tax is a major revenue earner for the regional governments in such countries.