31 Facts About VAT

VAT is an indirect tax because the person who ultimately bears the burden of the tax is not necessarily the same person as the one who pays the tax to the tax authorities.

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.

VAT raises about a fifth of total tax revenues both worldwide and among the members of the Organisation for Economic Co-operation and Development .

The subtraction method VAT is currently used only by Japan although it, often by using the name "flat tax, " has been part of many recent tax reform proposals by US politicians.

Germany and France were the first countries to implement VAT, doing so in the form of a general consumption tax during World War I The modern variation of VAT was first implemented by France in 1954 in Ivory Coast colony.

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Amount of VAT is decided by the state as a percentage of the price of the goods or services provided.

Main reason that VAT has been successfully adopted in 116 countries as of 2020 is because it provides an incentive for businesses to both register and keep invoices, and it does this in the form of zero rated goods and VAT exemption on goods not resold.

In general, countries that have a VAT system require most businesses to be registered for VAT purposes.

VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction .

The VAT mechanism means that the end-user tax is the same as it would be with a sales tax.

The main disadvantage of VAT is the extra accounting required by those in the middle of the supply chain; this is balanced by the simplicity of not requiring a set of rules to determine who is and is not considered an end user.

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.

Note: The VAT system adopted in Europe affects company cashflow due to compliance costs and fraud risk for governments due to overclaimed taxes.

VAT was implemented in China in 1984 and is administered by the State Administration of Taxation.

VAT that is charged by a business and paid by its customers is known as "output VAT" .

VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" .

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.

VAT was introduced into the Indian taxation system from 1 April 2005.

VAT was Collected by the Directorate General of Taxation, Ministry of Finance.

VAT was implemented in 1998 and is the major source of government revenue.

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.

In Spain, the VAT law has categorized goods and services into three types based on function, with according tax percentages.

State of Michigan used a form of VAT known as the "Single Business Tax" as its form of general business taxation.

Some countries implementing a VAT have reduced income tax on lower income-earners as well as instituted direct transfer payments to lower-income groups, resulting in lowering tax burdens on the poor.

In many countries 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.

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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.

VAT consequently leads to a deadweight loss if cutting prices pushes a business below the margin of profitability.

VAT offers distinctive opportunities for evasion and fraud, especially through abuse of the credit and refund mechanism.

VAT overclaim is a risk for the state due to fraudulent claims for input repayment by registered traders and carousel fraud.

VAT is included in the price index to which state benefits such as pensions and welfare payments are linked, as well as public sector pay, some of the apparent revenue is churned i e taxpayers have to be given the money to pay the tax with, resulting in zero net revenue.

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.