Everything you need to know about Value Added Tax

Everything you need to know about Value Added Tax

A value-added tax (VAT) is a tax charged indirectly on certain goods and services by the buyer to the seller or service provider. The VAT has been in existence since the 1950s, and it is adopted in almost all the nations of the earth.

Now, there are certain things you need to know about Value-Added Tax (VAT) which is the thrust of this article. 

Some of the things you’ll learn here:

  • The meaning and history of Value-Added Tax
  •  VATable goods and services
  • Non-VATable goods and services 
  • Benefits of a VAT
  • Drawbacks/Problems of a VAT, and lots more!

Let’s start……….

What is A Value-Added Tax?

A value-added tax (VAT) is a form of consumption tax that a buyer pays indirectly together with the purchase price of a product to the seller. The seller or service provider will then pay the VAT to the local tax authority in that state.

Value Added Tax (VAT) was first introduced in the 1950s, before it later gained international recognition. Unlike other taxes that are charged on people’s earnings, savings, or investments, VAT is imposed solely on what people buy. It is imposed on the value added at each product’s production and distribution stage. 

However, it must be noted that VAT is not limited to only goods; it is also imposed on the sale of certain services. (We shall discuss this later in this article)

It is compulsory for every business that has registered for VAT to charge VAT on all goods and services it exchanges unless they are considered “Zero rated” or “Exempt”

Is everything taxed?

No. There are certain categories of goods and services that are completely free from VAT. They are:

i. Exempt: goods or services that is exempt from payment of VAT by government notification.

ii. Zero rated: goods or services that are VATable, but the VAT rate is zero per cent (0%).

What are the Goods exempted from VAT?

  • Basic food items
  • Commercial vehicles and their spare parts
  • Baby products
  • Books and Educational items or materials
  • All exports, etc.

What are the Services exempted from VAT?

  • Education-related services
  • Bank-related services 
  • Medical-related services
  • All Exported services
  • Certain government grants, etc.

Who pays the VAT?

Since the Value Added Tax [VAT] is a consumption-imposed tax, it is paid by consumers to the seller or service provider. The seller will then remit the tax collected to the local tax authority in that state.

What are the documents needed to register for VAT?

  • Documents required For Companies:
  • Articles of Incorporation 
  • Notice of Address/Change of Address 
  • Notice of Directors/Change of Directors 
  • Request for Name Search/Reservation 
  • Certificate of Incorporation 

Documents required For Individuals or Partnerships:

  • Application for Business Name 
  • Certificate of Registration

Benefits of a VAT

  • A VAT would encourage savings
  • A VAT is simple to administer as compared to other indirect tax
  • It leads to a better balanced tax system
  • VAT generates more income for the government 
  • VAT is a better way of solving lost online sales taxes since online sales would also charged 
  • It minimizes tax evasion since it is automatically charged on goods or services
  • It does not put unnecessary burden on the consumers as it is collected in small installments at various production and distribution stages 
  • VAT does not bring about price increase as it is based on value added not on total price.
  • VAT is paid by larger population of taxpayers
  • Due to its neutrality, VAT can be imposed on all types of business
  • VAT increases the efficiency of the state’s Internal Revenue Service (IRS).

Drawbacks/Problems of a VAT

  • VAT is regressive in nature as it affects the poor people more than the rich.
  • Businesses have to calculate VAT on every product, at every step of the process, which might be daunting at times
  • VAT leads to excessive spending;
  • It might pose threats to new and marginal business activities
  • It is a “hidden tax”
  • VAT is based on full billing system, making it costly to implement 
  • VAT can result in unnecessary transaction delays
  • VAT could create conflicts in a situation where each state and local government in a country pegs their individual sales taxes at varying rates.

Wrapping Up….

We do hope you’ve learnt something new about Value Added Tax (VAT) . If you have any issue you need to be resolved, then consult your tax preparer. 

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