PROFESSOR PHYLIS ISLEY
FALL 2012 STRAYER UNIVERISTY
VALUE ADDED TAX
Explain the concept of value-added tax (VAT).
VAT is a tax in which it is applied to the difference between the business’s sales of goods and services and its purchases of goods and services. In other words, the businesses pay taxes on what they add to their goods and services to their customers. Value-added taxes are collected throughout the process of the business transactions, i.e. production and distribution, not just at the point of sale.
Here is White’s brief rundown of how the value-added tax works at 10 percent. A company that makes computer processor chips sells them to a computer manufacturer for $50. However, in the invoice, the price is $50 for the processor chip and $5 for the value-added tax which will be paid to the government by the computer processor chip company. The computer manufacturer then sells computers to the computer retail store for $120, but with a value-added tax of $12. The computer manufacturer, however, would pay the value-added tax that they put into the product. Therefore, the computer manufacturer would pay $7 ($12 - $5) to the government. The computer retail store sells the computer for $150 with a value-added tax of $15. Once again, the computer retail store would pay the value-added tax that they put into the product minus what was already added to the government. Therefore, the computer retail store would pay $3 ($15 - $12) to the government. After all is said and done, the government would get 10 percent of the final price.
Value added tax, also known as goods and services tax or GST proves to be beneficial for the government. Through implementation of this tax system, government can raise revenues invisibly, where the tax is not shown on the bill paid by the buyer. VAT is different from sales tax in various aspects. While sales tax is to be paid on the total value of the goods and services, VAT is levied on every exchange of the product, so that consumers do not have to carry the total cost of tax. However, VAT is generally not applied on export goods to avoid double taxation on the final product. However, if VAT is charged on export goods, the tax amount is usually refunded to the taxpayer.
Value added tax can also be recovered. The individual consumers cannot recover VAT on purchases made by them. However, businesses can recover VAT on the services and materials, which are bought by them in order to continue the supply of the products and services.
VAT was introduced to arrest the increasing smuggling and cheating, which were resultants of high sales tax and tariffs. Initiated in France, VAT is used as an instrument of taxation in all the member states of the European Union. Different VAT rates are employed in different member states of EU.
The value added tax serves as the solution for different problems related to the sales tax system. Unlike sales tax, in VAT, there is provision for input tax credit or ITC. Due to the simplicity of the VAT system, the entire taxation system on consumer products and services has become easier.
Analyze the pros and cons of imposing a VAT.
Paying taxes costs money. Major companies are all responsible for paying the government the sales tax they charge you as the consumer. They must have dedicated staffs to make sure they pay the right amount in each state. This is an expense to the company. Samsung, in its relationship as a manufacturer providing products to APPLE, doesn’t have to pay a sales tax. Why should APPLE have to bear the expense of taking care of sales tax, when there’s two sides of every transaction? Employing the VAT would force all parties to bear the brunt equally. The VAT is also a consumption tax, so there is incentive for you to limit your spending....