(Redirected from VAT)
|Look up value added tax in Wiktionary, the free dictionary.|
For the UK tax, see Value Added Tax (United Kingdom).
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 generate tax revenues to the government similar to the corporate income tax or the personal income tax.
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.
Maurice Lauré, Joint Director of the France Tax Authority, the Direction Générale des Impôts, was first to introduce VAT on 10 April 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state.
Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax—persuade the seller that the buyer is not really an end consumer, and therefore the seller is not legally required to collect it. Therefore, the burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, and the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax and eliminates a decision needing to be made by the seller about whether the buyer is or is not an end consumer.
Comparison with sales tax
Value added tax avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as of some autonomy.
In theory sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler.
A general economic idea is that if sales taxes are high enough, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism. However, because of its particular mechanism of collection, VAT becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states
The standard way to implement a value added tax involves assuming a business owes some fraction on the price of the product minus all taxes previously paid on the good.
By the method of collection, VAT can be accounts-based or invoice-based. Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method.
By the timing of collection, VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds—no matter when the sale had been made. Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque date—regardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred.
Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
Further information: Comparison of cash method and accrual method of accounting
VAT registered means registered for VAT purposes, that is entered into an official VAT payers register of a country. Both natural persons and legal entities can be VAT registered. Countries that use VAT have established different thresholds for remuneration derived by natural persons/legal entities during a calendar year (or a different period), by exceeding which the VAT registration is compulsory. Natural persons/legal entities that are VAT registered are obliged to calculate VAT on certain goods/services that they supply and pay VAT into a particular state budget. VAT registered persons/entities are entitled to a VAT deduction under legislative regulations of a particular country. The introduction of a VAT can reduce the cash economy because businesses that wish to buy and sell with other VAT registered businesses must themselves be VAT registered.
Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term "gross margin" is used rather than "profit". Profit is the remainder of what is left after paying other costs, such as rent and personnel costs.
Without any tax
- A widget manufacturer spends for example $1.00 on raw materials and uses them to make a widget.
- The widget is sold wholesale to a widget retailer for $1.20, making a gross profit of $0.20
- The widget retailer then sells the widget to a widget consumer for $1.50, making a gross profit of $0.30
With a sales tax
With a 10% sales tax:
- The manufacturer spends $1.00 for the raw materials, certifying it is not a final consumer.
- The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
- The retailer charges the consumer $1.50 + ($1.50 x 10%) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30.
So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.
A large exception to this state of affairs is online sales. Typically if the online retail firm has no "presence" in the state where the merchandise will be delivered, no obligation is imposed upon the retailer to collect sales taxes from "out-of-state" purchasers. Generally, state law requires that the purchaser report such purchases to the state taxing authority and pay the sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation.
With a value added tax
With a 10% VAT:
- The manufacturer spends $1.10 ($1 + ($1 × 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10.
- The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 × 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20 ($1.32 – $0.02 – $1.10 = $0.20).
- The retailer charges the consumer $1.65 ($1.50 + ($1.50 × 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 – $0.03 – $1.32 = $0.30).
- The manufacturer and retailer realize less gross margin from a percentage perspective.
- Note that the taxes paid by both the manufacturer and the retailer to the government are 10% of the values added by their respective business practices (e.g. the value added by the manufacturer is $1.20 minus $1.00, thus the tax payable by the manufacturer is ($1.20 – $1.00) × 10% = $0.02).
With VAT, the consumer has paid, and the government received, the same dollar amount as with a sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.
On the other hand, they incur increased accounting costs for collecting the tax, which are not reimbursed by the taxing authority. For example, wholesale companies now have to hire staff and accountants to handle the VAT paperwork, which would not be required if they were collecting sales tax instead. If you calculate the added overhead required to collect VAT, businesses collecting VAT have less profits overall than businesses collecting sales tax.
The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.
Limitations to the examples
In the above examples, we assumed that the same number of widgets were made and sold both before and after the introduction of the tax. This is not true in real life.
The supply and demand economic model suggests that any tax raises the cost of transaction for someone, whether it is the seller or purchaser. In raising the cost, either the demand curve shifts leftward, or the supply curve shifts upward. The two are functionally equivalent. Consequently, the quantity of a good purchased decreases, and/or the price for which it is sold increases.
This shift in supply and demand is not incorporated into the above example, for simplicity and because these effects are different for every type of good. The above example assumes the tax is non-distortionary.
This argument of limitations also assumes perfect competition, ignores post-scarcity, ignores artificial scarcity, ignores government-granted monopoly and other real life factors typically taken into account by economists when dealing with these issues. It is here to present a very simplified argument of limitations to illustrate possible arguments coming via the group of macroeconomic thought known as supply-side economics.
Limitations of VAT
A VAT, like most taxes, distorts what would have happened without it. Because the price for someone rises, the quantity of goods traded decreases. Correspondingly, some people are worse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. If the income lost by the economy is greater than the government's income; the tax is inefficient. It must be noted that a VAT and a Non-VAT has the same implications on the microeconomic model.
The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities – in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like VAT are often considered superior because they distort incentives to invest, save and work less than most other types of taxation – in other words, a VAT discourages consumption rather than production.
In the diagram on the right:
- Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve
- Governments tax income: the grey rectangle that says "tax revenue"
- Total consumer surplus after the shift: the green area
- Total producer surplus after the shift: the yellow area
Imports and exports
Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. There is a significant difference between VAT and Sales Tax for goods that are imported and exported:
- VAT is charged for a commodity that is exported while sales tax is not
- Sales Tax is paid for the full price of the imported commodity, while VAT is expected to be charged only for value added to this commodity by the importer and the reseller
This means that, without special measures, goods that are imported from one country that does have VAT to another country that does not have VAT will be taxed twice. The exporting country will charge VAT and the importing country will charge sales tax. Vice versa, goods that are imported from a country that does not have VAT to another country that does have VAT will result in no sales tax for those goods, and only a fraction of the usual VAT. There are also significant differences in taxation for goods that are being imported / exported between countries with different VATs. Sales tax does not have all those problems – it is charged in the same way for both imported and domestic goods, and it is never charged twice.
To fix this problem of VAT, nearly all countries that use VAT use special rules for imported and exported goods:
- All imported goods are charged VAT tax for their full price when they are sold for the first time
- All exported goods are exempted from any VAT payments
For these reasons VAT on imports and VAT rebates on exports form a common practice approved by the World Trade Organization.
|This section may be confusing or unclear to readers. (October 2013)|
Consider a Ford car that cost $25,000 to produce in the USA (that does not have a VAT, but does have 10% Sales Tax) and an Opel car that costs $25,000 to produce in Germany (that does have 20% VAT). Both prices are shown with all taxes imposed on manufacturers of these cars, including social taxes, income taxes, etc., but without taxes imposed on consumers – that is, Sales Tax in USA and VAT in Germany.
Without a special modification related to Export / Import, customer prices will be
|Price paid for Ford
|Price paid for Opel
|Taxes paid for Ford
|Taxes paid for Opel
|In the USA||$27,500||$33,000||$2,500 (Sales Tax only)||$8,000 (Sales tax and VAT)|
|In Germany||$25,000||$30,000||$0 (none)||$5,000 (VAT)|
Note that Opel prices appear to be inherently higher than Ford ones. A common mistake in a lot of examples trying to prove that VAT rebates form as a trade barrier is, to set retail prices equal for both Ford and Opel. This way, prices are initially equal, but become different after all the additional VAT taxes and rebates described below. Such an approach doesn't take into account the simple fact that Opel prices in the table above always include VAT while Ford prices never include it. That's exactly why additional adjustments are made in VAT taxation.
One may try to object that this simply means that Germany has generally higher taxes but, in fact, this is not the case for consumer taxes. Consider a hypothetical situation where consumer tax remains exactly the same in Germany as in the example above, but now it is collected as 16.7% Sales Tax:
|Price paid for Ford
|Price paid for Opel
|Taxes paid for Ford
|Taxes paid for Opel
|In the USA||$27,500||$27,500||$2,500 (Sales Tax only)||$2,500 (Sales Tax only)|
|In Germany||$30,000||$30,000||$5,000 (Sales Tax only)||$5,000 (Sales Tax only)|
The amount of tax is clearly different in the USA and Germany, but the skew in taxes between Opel and Ford has gone. Now everything is taxed in same way: Opel isn't taxed twice, and Ford is taxed when its cars are imported to Germany. Note that the price of Opel cars in Germany is the same for both examples.
Rebating VAT on imports allows the same retail prices & customer taxation without abandoning VAT. Instead, the seller of imported Fords in Germany is charged 20% VAT for the whole price of Fords sold ($5,000), and the exporter of Opels is rebated $5,000 out of $30,000 he spent to buy each.
Value Added Tax in Bangladesh was introduced in 1991 replacing Sales Tax and most of Excise Duties. The Value Added Tax Act, 1991 was enacted that year and VAT started its passage from 10 July 1991. The 10 July is observed as National VAT Day in Bangladesh.
Within the passage of 22 years, VAT has become the largest source of Government Revenue. About 56% of total tax revenue is VAT revenue in Bangladesh.
Standard VAT rate is 15%. Export is Zero rated. Besides these rates, there are several reduced rates locally called Truncated Rate for service sector are available. Different rates for different services are applied. Truncated Rates are 1.5%, 2%, 2.25%, 3%, 4%, 4.5%, 5%, 6% and 9%.
Bangladesh VAT is characterized by many distortions. Value declaration for product and service, branch registration, tariff value, truncated rates, many restriction on credit system, advance payment of VAT, excessive exemption etc. For many distortion, VAT-GDP ratio is about 4% here. To increase productivity of VAT, Government has enacted new act namely Value Added Tax and Supplementary Duty Act, 2012. This law will be in operation from 2015 with an automated administration.
National Board of Revenue 1 is the apex organization administering Value Added Tax.
Main article: European Union value added tax
The European Union value added tax (EU VAT) is a value added tax encompassing member states in the European Union VAT area. Joining in this is compulsory for member states of the European Union. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. The EU VAT's key issue asks where the supply and consumption occurs thereby determining which member state will collect the VAT and which VAT rate will be charged.
Each Member State's national VAT legislation must comply with the provisions of EU VAT law as set out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does allow Member States some degree of flexibility in implementation of VAT legislation. For example different rates of VAT are allowed in different EU member states. However Directive 2006/112 requires Member states to have a minimum standard rate of VAT of 15% and one or two reduced rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies- these Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers and certain magazines in Belgium). The current maximum rate in operation in the EU is 27% (Hungary), though member states are free to set higher rates.
VAT that is charged by a business and paid by its customers is known as "output VAT" (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government.
The VAT Directive (prior to 1 January 2007 referred to as the Sixth VAT Directive) requires certain goods and services to be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage).
VAT was implemented in China in 1984 and is administered by the State Administration of Taxation. In 2007, the revenue from VAT was 15.47 billion yuan ($2.2 billion) which made up 33.9 percent of China's total tax revenue for the year. The standard rate of VAT in China is 17%. There is a reduced rate of 13% that applies to products such as books and types of oils.
The Nordic countries
MOMS (Danish: merværdiafgift, formerly meromsætningsafgift), Norwegian: merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (abbreviated MVA), Swedish: mervärdesskatt (earlier mervärdesomsättningsskatt), Icelandic: virðisaukaskattur (abbreviated VSK), Faroese: meirvirðisgjald (abbreviated MVG) or Finnish: arvonlisävero (abbreviated ALV) are the Nordic terms for VAT. Like other countries' sales and VAT taxes, it is an indirect tax.
|Year||Tax level (Denmark)||Name|
In Denmark, VAT is generally applied at one rate, and with few exceptions is not split into two or more rates as in other countries (e.g. Germany), where reduced rates apply to essential goods such as foodstuffs. The current standard rate of VAT in Denmark is 25%. That makes Denmark one of the countries with the highest value added tax, alongside Norway, Sweden and Croatia. A number of services have reduced VAT, for instance public transportation of private persons, health care services, publishing newspapers, rent of premises (the lessor can, though, voluntarily register as VAT payer, except for residential premises), and travel agency operations.
In Finland, the standard rate of VAT is 24% as of 1 January 2013 (raised from previous 23%), along with all other VAT rates, excluding the zero rate. In addition, two reduced rates are in use: 14% (reduced in October 2009 from 17% to 12% for non-restaurant food, increased to 13% from July 2010, also encompasses restaurant food from July 2010; increased to 14% 1 January 2013), which is applied on food and animal feed, and 10%, (increased from 9% 1 January 2013) which is applied on passenger transportation services, cinema performances, physical exercise services, books, pharmaceuticals, entrance fees to commercial cultural and entertainment events and facilities. Supplies of some goods and services are exempt under the conditions defined in the Finnish VAT Act: hospital and medical care; social welfare services; educational, financial and insurance services; lotteries and money games; transactions concerning bank notes and coins used as legal tender; real property including building land; certain transactions carried out by blind persons and interpretation services for deaf persons. The seller of these tax-exempt services or goods is not subject to VAT and does not pay tax on sales. Such sellers therefore may not deduct VAT included in the purchase prices of his inputs.
In Iceland, VAT is split into two levels: 25.5% for most goods and services but 7% for certain goods and services. The 7% level is applied for hotel and guesthouse stays, licence fees for radio stations (namely RÚV), newspapers and magazines, books; hot water, electricity and oil for heating houses, food for human consumption (but not alcoholic beverages), access to toll roads and music.
In Norway, VAT is split into three levels: 25% general rate, 15% on foodstuffs and 8% on on the supply of passenger transport services and the procurement of such services, on the letting of hotel rooms and holiday homes, and on transport services regarding the ferrying of vehicles as part of the domestic road network. The same rate applies to cinema tickets and to the television licence. Financial services, health services, social services and educational services are all outside the scope of the VAT Act. Newspapers, books and periodicals are zero-rated. Svalbard has no VAT because of a clause in the Svalbard Treaty.
In Sweden, VAT is split into three levels: 25% for most goods and services, 12% for foods including restaurants bills and hotel stays and 6% for printed matter, cultural services, and transport of private persons. Some services are not taxable for example education of children and adults if public utility, and health and dental care, but education is taxable at 25% in case of courses for adults at a private school. Dance events (for the guests) have 25%, concerts and stage shows have 6%, and some types of cultural events have 0%.
MOMS replaced OMS (Danish "omsætningsafgift", Swedish "omsättningsskatt") in 1967, which was a tax applied exclusively for retailers.
Further information: Value added taxation in India
VAT was introduced into the Indian taxation system from 1 April 2005. Of the 28 Indian states, eight did not introduce VAT. Each Indian state has a different sales tax. The government of Tamil Nadu introduced an act by the name Tamil Nadu Value Added Tax Act 2006 which came into effect from the 1 January 2007. It was also known as the TNVAT.
Gulf Cooperation Council
Main article: Cooperation Council for the Arab States of the Gulf
Increased growth and pressure on the GCC's governments to provide infrastructure to support growing urban centers, the Member States of the Arabic Gulf Cooperation Treaty, which together make up the Gulf Cooperation Council (GCC), have felt the need to introduce a tax system in the region.
In particular, the United Arab Emirates (UAE) has clarified that government officials are studying the situation and considering implementation of a Value Added Tax.
Value added tax (Spanish: Impuesto al Valor Agregado, IVA) is a tax applied in Mexico and other countries of Latin America. In Chile it is also called Impuesto al Valor Agregado and in Peru it is called Impuesto General a las Ventas or IGV.
Prior to the IVA, a sales tax (Spanish: impuesto a las ventas) had been applied in Mexico. In September 1966, the first attempt to apply the IVA took place when revenue experts declared that the IVA should be a modern equivalent of the sales tax as it occurred in France. At the convention of the Inter-American Center of Revenue Administrators in April and May 1967, the Mexican representation declared that the application of a value added tax would not be possible in Mexico at the time. In November 1967, other experts declared that although this is one of the most equitable indirect taxes, its application in Mexico could not take place.
In response to these statements, direct sampling of members in the private sector took place as well as field trips to European countries where this tax was applied or soon to be applied. In 1969, the first attempt to substitute the mercantile-revenue tax for the value added tax took place. On 29 December 1978 the Federal government published the official application of the tax beginning on 1 January 1980 in the Official Journal of the Federation.
As of 2010, the general VAT rate is 16%. This rate is applied all over Mexico except for bordering regions (i.e. the United States border, or Belize and Guatemala), where the rate is 11%. The main exemptions are for books, food, and medicines on a 0% basis. Also some services are exempt like a doctor's medical attention.
Main article: Goods and Services Tax (New Zealand)
The goods and services tax (GST) is a value added tax that was introduced in New Zealand in 1986, currently levied at 15%. It is notable for exempting few items from the tax. From July 1989 to September 2010, GST was levied at 12.5%, and prior to that at 10%.
Main article: Goods and Services Tax (Australia)
The goods and services tax (GST) is a value added tax introduced in Australia in 2000, which is collected by the Australian Tax Office. The revenue is then redistributed to the states and territories via the Commonwealth Grants Commission process. In essence, this is Australia's program of horizontal fiscal equalisation. Whilst the rate is currently set at 10%, there are many domestically consumed items that are effectively zero-rated (GST-free) such as fresh food, education, and health services, as well as exemptions for Government charges and fees that are themselves in the nature of taxes.
Goods and Services Tax (GST) is a Value Added Tax introduced by the Federal Government in 1991 at a rate of 7%, later reduced to the current rate of 5%. A Harmonized Sales Tax (HST; combined GST and provincial sales tax) is collected in New Brunswick (13%), Newfoundland (13%), Nova Scotia (15%), Ontario (13%), Prince Edward Island (14%), and, for a short time until 2013, British Columbia (12%). (Quebec has a de facto 14.975% HST: its provincial sales tax follows the same rules as the GST, and both are collected together by Revenu Québec.) Advertised and posted prices generally exclude taxes, which are calculated at time of payment; exceptions are motor fuels, the posted prices for which include sales and excise taxes, and items in vending machines as well as alcohol in monopoly stores. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt.
Further information: Sales taxes in the United States
In the United States, currently (2013), there is no federal value-added tax (VAT) on goods or services. Instead, sales tax is common in most US states.
The state of Michigan used a form of VAT known as the "Single Business Tax" (SBT) as its form of general business taxation. It is the only state in the United States to have used a VAT. When it was adopted in 1975, it replaced seven business taxes, including a corporate income tax. On 9 August 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which was replaced by the Michigan Business Tax on 1 January 2008.
The state of Hawaii has a 4% General Excise Tax (GET) that is charged on the gross income of any business entity generating income within the State of Hawaii. The State allows businesses to optionally pass on their tax burden by charging their customers a quasi sales tax rate of 4.166%. The total tax burden on each item sold is more than the 4.166% charged at the register since GET was charged earlier up the sales chain (such as manufacturers and wholesalers), making the GET less transparent than a retail sales tax.
Discussions about a national US VAT
Soon after President Richard Nixon took office in 1969, it was widely reported that his administration was considering a federal VAT with the revenue to be shared with state and local governments to reduce their reliance on property taxes and to fund education spending. In 1969 Nixon established a task force on business taxation to look at business tax policy. Most of the task force concluded that VAT shouldn’t be adopted as a substitute, in whole or in part, for the existing federal tax structure.
In October 2009, then-House Speaker Nancy Pelosi stated that a new national VAT was "on the table" to help the federal government garner needed revenues. After her speech the Americans for Tax Reform group urged the public to contact their members of Congress to oppose this potential measure. President Barack Obama was reported to be open to a national VAT. One day later, US Treasury Secretary Tim Geithner stated that President Obama does not support a VAT for the US.
The Washington Post columnist Robert J. Samuelson has estimated that, in order to cover the projected increase in government spending by 2020, a VAT would need to be about 16%. Although an 8% VAT would theoretically suffice, there would be huge pressures to exempt groceries, rent and housing, health care, education, and charitable groups.
|Country||Standard rate||Reduced rate||Abbr.||Name|
|Austria||20%||10% for rental for the purpose of habitation, transportation of passengers, garbage collection, books and periodicals, food, revenues from artistic works.||MwSt./USt.||Mehrwertsteuer/Umsatzsteuer|
|Belgium||21%||12% or 6% (for food or live necessary consumables) or 0% in some cases||BTW
|Belasting over de toegevoegde waarde
Taxe sur la Valeur Ajoutée
|Bulgaria||20%||7% or 0%||ДДС||Данък добавена стойност|
|Croatia||25%||10% or 5% (since 1 January 2013)||PDV||Porez na dodanu vrijednost|
|Cyprus||17%||5% (8% for taxi and bus transportation)||ΦΠΑ||Φόρος Προστιθέμενης Αξίας|
|Czech Republic||21%||15% (food, medicines, books, public transport)||DPH||Daň z přidané hodnoty|
|Finland||24%||14% or 10%||ALV
|France||19.6%||5.5% or 2.1% or 7%||TVA||Taxe sur la valeur ajoutée|
|Germany||Heligoland 0%)19% (||Heligoland always 0%)7% or 0%, for foodstuffs (except luxury-), books, flowers etc. (||MwSt./USt.||Mehrwertsteuer/Umsatzsteuer|
(16% on Aegean islands)
13% (6.5% for hotels and pharmacies)|
(8% and 4% on Aegean islands)
|ΦΠΑ||Φόρος Προστιθέμενης Αξίας|
|Hungary||27%||18% or 5%||ÁFA||Általános forgalmi adó|
|Ireland||23%||13.5% or 9.0% or 4.8% or 0%||CBL
|Cáin Bhreisluacha (Irish)
Value Added Tax (English)
|Italy||Livigno 0%)22% (||10% (hotels, bars, restaurants and other tourism products, certain foodstuffs, plant protection products and special works of building restoration) or 4% (e.g. grocery staples, daily or periodical press and books, works for the elimination of architectural barriers, some kinds of seeds, fertilizers)||IVA||Imposta sul Valore Aggiunto|
|Latvia||21%||12% or 0%||PVN||Pievienotās vērtības nodoklis|
|Lithuania||21%||9% or 5%||PVM||Pridėtinės vertės mokestis|
|Luxembourg||15%||12% or 9% or 6% or 3%||TVA||Taxe sur la Valeur Ajoutée|
|Malta||18%||5% or 0%||VAT||Taxxa tal-Valur Miżjud|
|Netherlands||21%||6% or 0%||BTW||Belasting over de toegevoegde waarde|
|Poland||23%||8% or 5% or 0%||PTU/VAT||Podatek od towarów i usług|
22% in Madeira and 16% in Azores (Minimum 70% of mainland rate)
13% or 6%|
12% or 5% in Madeira and 9% or 4% in Azores (Minimum 70% of mainland rate)
|IVA||Imposto sobre o Valor Acrescentado|
|Romania||24%||9% (medication and books) or 5% (first time buyers of new homes under special conditions)||TVA||Taxa pe valoarea adăugată|
|Slovakia||20%||10%||DPH||Daň z pridanej hodnoty|
|Slovenia||22%||9.5%||DDV||Davek na dodano vrednost|
7% in Canary Islands (not part of EU VAT area)
10% (10% from 1 September 2012) or 4%|
3% or 0% in Canary Islands
|Impuesto sobre el Valor Añadido
Impuesto General Indirecto Canario
|Sweden||25%||12% (e.g. food, hotels and restaurants) or 6% (e.g. public transport and books)||Moms||Mervärdesskatt|
0% on Channel Islands and Gibraltar (not part of EU VAT area)
|5% for home energy and renovations and 0% for life necessities – groceries, water, prescription medications, medical supplies and equipment, children clothing, public transport, books and periodicals||VAT||Value Added Tax|
|Country||Standard rate||Reduced rate||Local name|
|Albania||20%||10% (pharmacies and medical services)||TVSH = Tatimi mbi Vlerën e Shtuar|
|Kosovo||16%||TVSH = Tatimi mbi Vlerën e Shtuar|
|Andorra||4.5%||1%||IGI = Impost General Indirecte|
|Azerbaijan||18%||10.5% or 0%||ƏDV = Əlavə dəyər vergisi|
|Argentina||21%||10.5% or 0%||IVA = Impuesto al Valor Agregado|
|Armenia||20%||0%||AAH = Avelacvats Arzheqi Hark
ԱԱՀ = Ավելացված արժեքի հարկ
|Australia||10%||0%||GST = Goods and Services Tax|
|Belarus||20%||10% or 0.5%||ПДВ = Падатак на дададзеную вартасьць|
|Bangladesh||15%||4% for Supplier, 4.5% for ITES, 5% for electricity, 5.5% for construction firm, etc.||VAT = Value Added Tax
মূসক = মূল্য সংযোজন কর
|Barbados||17.5%||VAT = Value Added Tax|
|Bosnia and Herzegovina||17%||PDV = Porez na dodanu vrijednost|
|Brazil||12% + 25% + 5%||0%||*IPI – 12% = Imposto sobre produtos industrializados (Tax over industrialized products) – Federal Tax
ICMS – 25% = Imposto sobre circulação e serviços (Tax over commercialization and services) – State Tax
ISS – 5% = Imposto sobre serviço de qualquer natureza (Tax over any service) – City tax
*IPI = Imposto sobre produtos industrializados (Tax over industrialized products) can reach 60% over imported products.
|Bolivia||13%||IVA = Impuesto al Valor Agregado|
|Canada||5% + 0–10% HST (GST + PVAT)||5%/0%2||GST = Goods and Services Tax, TPS = Taxe sur les produits et services; HST1 = Harmonized Sales Tax, TVH = Taxe de vente harmonisée|
|Chile||19%||IVA = Impuesto al Valor Agregado|
|Colombia||16%||IVA = Impuesto al Valor Agregado|
|People's Republic of China3||17%||13% for foods, printed matter, and households fuels; 6% or 3%||增值税 (pinyin:zēng zhí shuì)|
|Dominican Republic||16%||12% or 0%||ITBIS = Impuesto sobre Transferencia de Bienes Industrializados y Servicios|
|Ecuador||12%||IVA = Impuesto al Valor Agregado|
|Egypt||10% (15% on Communication Services)||VAT = Value Added Tax (الضريبة على القيمة المضافة)|
|El Salvador||13%||IVA = Impuesto al Valor Agregado o "Impuesto a la Transferencia de Bienes Muebles y a la Prestación de Servicios"|
|Ethiopia||15%||VAT = Value Added Tax|
|Fiji||15%||0%||VAT = Value Added Tax|
|Faroe Islands||25%||MVG = Meirvirðisgjald|
|Georgia||18%||0%||DGhG = Damatebuli Ghirebulebis gadasakhadi დღგ = დამატებული ღირებულების გადასახადი|
|Ghana||13%||VAT = Value Added Tax including National Health Insurance Levy (NHIL; 2.5%)|
|Guatemala||12%||IVA = Impuesto al Valor Agregado|
|Guyana||16%||0%||VAT = Value Added Tax|
|Iran||6%||food, clothing, books, medicines||VAT = Value Added Tax (مالیات بر ارزش افزوده)|
|Iceland||25.5%||7%4||VSK, VASK = Virðisaukaskattur|
|India5||13.5%||12.5%,5%, 1%, or 0%||VAT = Valued Added Tax|
|Indonesia||10%||5%||PPN = Pajak Pertambahan Nilai|
|Israel6||18%7(Eilat 0%)||0% (fruits and vegetables, tourism services, diamonds, flights and apartments renting)||Ma'am = מס ערך מוסף|
|Japan||5%||shōhizei (消費税) ("consumption tax")|
|Jersey8||5%||0%||GST = Goods and Services Tax|
|Jordan||16%||GST = Goods and Sales Tax|
|Kazakhstan||12%||ҚCҚ = Қосымша салық құны (Kazakh)
НДС = Налог на добавленную стоимость (Russian)
VAT = Value Added Tax
|Lebanon||10%||TVA = Taxe sur la valeur ajoutée|
|Liechtenstein||8.0%||3.8% (lodging services) or 2.5%||MWST = Mehrwertsteuer|
|Morocco||20%||GST = Goods and Sales Tax (الضريبة على القيمة المضافة)|
|Republic of Moldova||20%||8%, 5% or 0%||TVA = Taxa pe Valoarea Adăugată|
|Macedonia||18%||5% or 0%||ДДВ = Данок на Додадена Вредност, DDV = Danok na Dodadena Vrednost|
|Malaysia9||6%||GST = Goods and Services Tax (Government Tax)|
|Maldives||6%||0%||GST = Goods and Services Tax (Government Tax)|
|Mexico||16%||11%, 0%||IVA = Impuesto al Valor Agregado|
|Monaco||19.6%||5.6%||TVA = Taxe sur la valeur ajoutée|
|Montenegro||19%||PDV = Porez na dodatu vrijednost|
|Mauritius||15%||VAT = Value Added Tax|
|Namibia||15%||0%||VAT = Value Added Tax|
|Nepal||13%||0%||VAT = Value Added Taxes|
|New Zealand||15%||GST = Goods and Services Tax|
|Norway||25%||15% (food), 8% (public transport, hotel, cinema) and 0% for electric cars (until 2018)||MVA = Merverdiavgift (bokmål) or meirverdiavgift (nynorsk) (informally moms)|
|Palestinian Territory||14.5%||VAT = Value Added Tax|
|Pakistan||16%||1% or 0%||GST = General Sales Tax|
|Panama||7%||0%||ITBMS = Impuesto de Transferencia de Bienes Muebles y Servicios|
|Paraguay||10%||5%||IVA= Impuesto al Valor Agregado|
|Peru||16%+2%||IGV – 16% = Impuesto General a la Ventas IPM – 2% Impuesto de Promocion Municipal|
|Philippines||12%10||6% on petroleum products, and electricity and water services
0% for senior citizens (all who are aged 60 and above) on medicines, professional fees for physicians, medical and dental services, transportation fares, admission fees charged by theaters and amusement centers, and funeral and burial services after the death of the senior citizen
|RVAT = Reformed Value Added Tax, locally known as Karagdagang Buwis / Dungag nga Buhis|
|Russia||18%||10% or 0%||НДС = Налог на добавленную стоимость, NDS = Nalog na dobavlennuyu stoimost’|
|Rwanda||18%||0%||VAT = Value Added Tax|
|Saint Kitts and Nevis||17%||VAT = Value Added Tax|
|Serbia||20%||8% or 0%||ПДВ = Порез на додату вредност, PDV = Porez na dodatu vrednost|
|Singapore||7%||GST = Goods and Services Tax|
|South Africa||14%||0%||VAT = Valued Added Tax; BTW = Belasting op toegevoegde waarde|
|South Korea||10%||VAT = 부가세(附加稅, Bugase) = 부가가치세(附加價値稅, Bugagachise)|
|Sri Lanka||12%||0%||VAT = Valued Added Tax has been in effect in Sri Lanka since 2001. On the 2001 budget, the rates have been revised to 12% and 0% from the previous 20%, 12% and 0%|
|Switzerland||8%||3.8% (hotel sector) and 2.5% (essential foodstuff, books, newspapers, medical supplies)||MWST = Mehrwertsteuer, TVA = Taxe sur la valeur ajoutée, IVA = Imposta sul valore aggiunto, TPV = Taglia sin la Plivalur|
|Taiwan||5%||增值稅 (pinyin:zēng zhí shuì)|
|Thailand||7%||VAT = Value Added Tax, ภาษีมูลค่าเพิ่ม|
|Trinidad and Tobago||15%||0%|
|Tunisia||18%||TVA = Taxe sur la Valeur Ajoutée آداء على القيمة المضافة|
|Turkey||18%||8% or 1%||KDV = Katma değer vergisi|
|Ukraine||20% (17% from January 2014)||0%||ПДВ = Податок на додану вартість, PDV = Podatok na dodanu vartist’.|
|Uruguay||22%||10%||IVA = Impuesto al Valor Agregado|
|Uzbekistan||20 %||НДС = Налог на добавленную стоимость|
|Vietnam||10%||5% or 0%||GTGT = Giá Trị Gia Tăng|
|Venezuela||12%||11%||IVA = Impuesto al Valor Agregado|
Note 1: HST is a combined federal/provincial VAT collected in some provinces. In the rest of Canada, the GST is a 5% federal VAT and if there is a Provincial Sales Tax (PST) it is a separate non-VAT tax.
Note 2: No real "reduced rate", but rebates generally available for new housing effectively reduce the tax to 4.5%.
Note 4: The reduced rate was 14% until 1 March 2007, when it was lowered to 7%. The reduced rate applies to heating costs, printed matter, restaurant bills, hotel stays, and most food.
Note 5: VAT is not implemented in 2 of India's 28 states.
Note 6: Except Eilat, where VAT is not raised.
Note 7: The VAT in Israel is in a state of flux. It was reduced from 18% to 17% in March 2004, to 16.5% in September 2005, then to 15.5% in July 2006. It was then raised back to 16.5% in July 2009, and lowered to the rate of 16% in January 2010. It was then raised again to 17% on 1 September 2012, and once again on 2 June 2013, to 18%.
Note 8: The introduction of a goods and sales tax of 3% on 6 May 2008 was to replace revenue from Company Income Tax following a reduction in rates.
Note 9: In the 2014 Budget, the government announced that GST would be introduced in April 2015. Piped water, power supply (the first 200 units per month for domestic consumers), transportation services, education, and health services are tax-exempt. However, many details have not yet been confirmed.
Countries and territories VAT free
As of November 2011, 11 countries and 9 territories under 2 countries remain VAT free in the world.
|United States||Most states charge a sales tax on products. The US Federal government doesn't. There are a few states, such as Oregon and New Hampshire, that don't charge.|
|Saudi Arabia||Gulf Cooperation Council|
|Qatar||Gulf Cooperation Council|
|United Arab Emirates||Gulf Cooperation Council|
|Kuwait||Gulf Cooperation Council|
|Bahrain||Gulf Cooperation Council|
|Oman||Gulf Cooperation Council|
|Hong Kong||special administrative region of China|
|Macao||special administrative region of China|
|British Virgin Islands||British Overseas Territory|
|Bermuda||British Overseas Territory|
|Cayman Islands||British Overseas Territory|
|Anguilla||British Overseas Territory|
|Gibraltar||British Overseas Territory|
|Turks and Caicos Islands||British Overseas Territory|
|Guernsey||British Crown Dependency|
|This section needs additional citations for verification. (January 2012)|
The "value added tax" has been criticized as the burden of it falls on personal end-consumers of products. Some critics consider it to be a regressive tax, meaning that the poor pay more, as a percentage of their income, than the rich. Defenders argue that relating taxation levels to income is an arbitrary standard, and that the value added tax is in fact a proportional tax in that people with higher income pay more in that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor.
Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.
Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value added. For example, a building contractor may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will thus bear lower costs and the building contractor may be able to avoid other taxes (profit or payroll taxes).
Because exports are generally zero-rated (and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips or mobile phones) are transported from one member state to another. During these transactions, some companies owe VAT, others acquire a right to reclaim VAT. The first companies, called 'missing traders', go bankrupt without paying. The second group of companies can 'pump' money straight out of the national treasuries. This kind of fraud originated in the 1970s in the Benelux countries. Today, the British treasury is a large victim. There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden, the major owner of a limited company is personally responsible for taxes. This is circumvented by having an unemployed person without assets as the formal owner.
Under a sales tax system, only businesses selling to the end-user are required to collect tax and bear the accounting cost of collecting the tax. Under VAT, however, manufacturers and wholesale companies also have to hire accountants and incur accounting expenses to handle the additional paperwork required for collecting VAT, increasing overhead costs that in turn get incorporated into the cost of the item, possibly creating a cascading effect of higher prices throughout the chain of production. Manufacturers and wholesalers have a choice of retaining less profits overall, or passing on the additional cost to their customers in the form of increased prices.
Many politicians and economists in the United States consider VAT taxation on US goods and VAT rebates for goods from other countries to be unfair practice. E.g. the American Manufacturing Trade Action Coalition claims that any rebates or special taxes on imported goods should not be allowed by the rules of the World Trade Organisation. AMTAC claims that so-called "border tax disadvantage" is the greatest contributing factor to the $5.8 trillion US current account deficit for the decade of the 2000s, and estimated this disadvantage to US producers and service providers to be $518 billion in 2008 alone. Some US politicians, such as congressman Bill Pascrell, are advocating either changing WTO rules relating to VAT or rebating VAT charged on US exporters by passing the Border Tax Equity Act.
Another avenue of criticism of implementing a VAT is that the increased tax passed to the consumer will increase the ultimate price paid by the consumer. However a study in Canada reveals that in fact when replacing a traditional sales tax with a VAT consumer prices actually fell.
- Flat tax
- Gross receipts tax
- Income tax
- Land value tax
- Missing Trader Fraud (Carousel VAT Fraud)
- Progressive tax
- Single tax
- Turnover tax
- X tax