VAT VERSUS SALES TAX

VAT:
A value-added tax (VAT), known in some countries as a goods and services tax
(GST), is a type of tax that is assessed incrementally, based on the increase in value of
a product or service at each stage of production or distribution. VAT essentially
compensates for the shared services and infrastructure provided in a certain locality by
a state and funded by its taxpayers that were used in the elaboration of that product or
service. Not all localities require VAT to be charged and goods and services for export
may be exempted (duty free). VAT is usually implemented as a destination-based tax,
where the tax rate is based on the location of the consumer and applied to the sales
price. Confusingly, the terms VAT, GST, consumption tax and sales tax are
sometimes used interchangeably. VAT raises about a fifth of total tax revenues both
worldwide and among the members of the Organization for Economic Co-operation
and Development (OECD). As of 2018, 166 of the world's approximately 193
countries employ a VAT, including all OECD members except the United States,
which uses a sales tax system instead.
VAT (Value-Added Tax) is collected by all sellers in each stage of the supply chain.
Suppliers, manufacturers, distributors and retailers all collect the value added tax on
taxable sales. Suppliers, manufacturers, distributors, retailers and end consumers all
pay the VAT on their purchases. Businesses must track and document the VAT they
pay on purchases that will be resold in order to receive a credit for the VAT paid on
their tax return. Tax jurisdictions receive the tax revenue throughout the entire supply
chain as opposed to at the sale to the final consumer chain.
Advantages Of Value Added Tax (VAT):

1. As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax
evasion due to its catch-up effect.

2. VAT is simple to administer as compared to other indirect tax.

3. VAT is transparent and has minimum burden to consumers as it is collected in small

fragments at various stages of production and distribution.

4. VAT is based on value added not on total price. So, price does not increases as a
result of VAT.

5. There is mass participation of taxpayers.

Disadvantages Of Value Added Tax (VAT):

1. VAT is costly to implement as it is based on full billing system.

2. VAT is relatively complex to understand. The calculation of value added in every

stage is not an easy task.

3. To implement the VAT successfully, customers, need to be conscious, otherwise tax

evasion will be widespread

SALES TAX:
A sales tax is a tax paid to a governing body for the sales of certain goods and
services. Usually laws allow (or require) the seller to collect funds for the tax from the
consumer at the point of purchase. When a tax on goods or services is paid to a
governing body directly by a consumer, it is usually called a use tax. Often laws
provide for the exemption of certain goods or services from sales and use tax.
Sales tax is collected by the retailer when the final sale in the supply chain is reached
via a sale to the end consumer. End consumers pay the sales tax on their purchases.
Businesses issue resale certificates to their sellers when buying business
supplies/inputs that will be resold since sales tax is not due. Tax jurisdictions do not
receive the tax revenue until the sale is made to the final consumer.
Advantages Of Sales tax:

Sales taxes are easy to “nickel-and-dime,” meaning that only a small amount of
money is involved.
People find sales tax to be optional in some sense. If an item or service has sales tax,
and if someone doesn’t want to pay the tax, they don’t have to buy the item.
Some states exempt prescriptions, ordinary clothing, and food from sales tax,
therefore, giving those with low income, a slight advantage.
Sales tax can also encourage or discourage the consumption of certain items, by
increasing or decreasing.
Disadvantages Of Sales tax:
Sales tax is a regressive tax, meaning that the lower your income is, the more you end
up paying. The reason for this is that sales taxes are not determined on income, and
even the poor must consume a certain number of goods and services.
Sales taxes are a hassle for businesses, because they are the ones responsible for
keeping track of them. Then, they have to pay the government, so they act as the
middle link between the consumer and the state.

DIFFERENCE BETWEEN SALES TAX AND VAT:

What triggers the tax administration requirement?

 Sales tax:
 Nexus – Taxpayers with sufficient presence in a tax jurisdiction.
 VAT:
 Permanent Establishment – Existence of a facility, bookkeeping facilities
or ability to enter contracts.
 Registration Threshold – Taxpayers with business activities that exceed
the monetary threshold in a tax jurisdiction.

Who collects and remits the tax?

For both sales tax and VAT, the seller is responsible for collecting the tax and
remitting to the appropriate tax authority.

Invoicing

 Sales tax: The seller should separately state sales tax.

 VAT: The seller should separately state VAT and include registration number for
a VAT invoice, however, in most VAT jurisdictions prices are tax inclusive.

Who pays the tax?

 Sales tax: The final consumer.

 VAT: All purchasers.

Taxability of purchases by business

 Sales tax: Resellers issue an exemption certificate to the vendor and do not pay
tax on purchases of items to be resold.
 VAT: Resellers pay tax to the vendor and reclaim the VAT for the tax amount
paid on business inputs.
Audit sticking points

 Sales tax: Vendors that sell to resellers must keep valid exemption certificates on
file or risk audit assessment turning exempt sales into taxable sales.
 VAT: All parties must keep invoices for purchases documenting VAT paid in
order to get the reclaimed VAT. Review of transactions where zero or reduced
rate VAT was paid and the reasons for this.

Revenue timing for tax authorities

 Sales tax: Tax authorities do not get tax revenue until the sale to the final
consumer.
 VAT: Tax authorities receive tax receipts earlier, getting them along the entire
distribution chain as value is added.

What should a purchaser do when a vendor does not have a liability to collect tax, or
on specific items as stated in tax law?

 Sales tax: Calculate and remit the appropriate use tax to the appropriate tax
authority.
 VAT: As a general rule a purchaser should calculate and report a reverse charge
when necessary.

Advantages of VAT over Sales Tax:

 As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents
repeated taxation of the same product.
 Simple and Transparent: In the Sales tax system the amount of tax levied on
the goods at all stages is not known. However, in VAT, the amount of tax
would be known at each and every stage of goods sale or purchase.
 VAT has the flexibility to generate large and buoyant revenues, as it levies tax
on value additions.
 Zero rating of tax on exports is possible in case of VAT.
 Fair and Equitable: VAT introduces uniform tax rates across the state so that
unfair advantage cannot be taken while levying the tax.
 Procedure of simplification: Procedures related to filing of returns, payment of
tax, furnishing declaration and assessment are simplified under the VAT
system so as to minimize any interface between the tax payer and the tax
collector.
 Ability to provide same revenue to the Government with lower rates of tax.