VAT vs Sales Tax
VAT and sales tax are two different forms of consumption taxes. However, they are different in the methods in which they are levied on consumers.
VAT
“VAT” stands for “Value Added Tax.” It is a form of indirect tax which is imposed on products or services at different stages of manufacturing. The tax is paid to the government directly by the producer, and the cost is passed on to the consumer. It is the consumer who has to finally pay for VAT. The value added to any product may be calculated as the sales price minus the cost of supply and the other taxable items. The value added tax is levied on imported goods as well as indigenous products.
The VAT system effectively covers the issues regarding declining and input tax credits which cause an increase in the price at the consumer level. The scope of skipping the tax payment is the least possibility in this system as the tax is imposed at every level of the production of goods. This system of tax payment involves much needed transparency and is easy to comprehend.
VAT is a form of consumption tax. One of the disadvantages of this system is that it requires comprehensive handling of accounts. This type of tax structure is being used all over the world but still not used in the United States. The VAT system of indirect taxes may pose some limitations in reference to developing countries.
Sales tax
Sales tax is levied at the time of the purchase of the products or services. The tax is easily calculated, and the consumer knows very well how much he is going to pay for the tax. The amount of sales tax may be calculated as a percentage of the taxable price of the sale. The tax is collected from the consumer by the seller at the time of purchase. The seller at a later stage transfers the tax to the responsible government agency. Sales tax is easy to calculate as they are charged on the final amount.
Sales taxes have stringent rules to follow. Ideally, these taxes would be difficult to avoid, have a high compliance rate, and are easy to collect. But the situation is actually different. Sales tax has a very high level of avoidance.
Sales tax is also a form of consumption tax.
Summary:
1.VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer.
2.VAT involves tricky accounting while sales tax involves simpler accounting.
3.VAT is applied at the various stages of production while sales tax is applied on the total value of the purchase.
4.VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this.