Value-added tax (VAT), known in some countries as goods and services tax (GST), is a type of tax assessed from time to time. It is charged on the price of a product or service at each stage of its production, distribution, or sale to the end consumer. If the end user is a company that collects and remits government VAT on its products or services, it can reclaim the tax already paid. It is similar and often compared to sales tax. VAT is an indirect tax because the person who ultimately bears the tax burden is not necessarily the same person who pays the tax to the tax authorities. VAT is not required everywhere, and exports are often exempt. VAT is generally applied as a destination tax, with the tax rate depending on the consumer's location and applied to the sales price. The terms VAT, GST and more general consumption tax are sometimes used interchangeably. VAT collects approximately one-fifth of total tax revenue worldwide and among members of the Organization for Economic Co-operation and Development (OECD). As of June 2023, 175 of the 193 full UN member states use VAT, including all OECD members except the United States, where most states use a sales tax system.
There are two main methods of calculating VAT: the credit or invoice-based method and the deduction or invoice-based method. Under the credit invoice method, the sales transaction is taxed, the customer is informed of the VAT on the transaction, and the company may receive a credit for the VAT paid on input materials and services. The credit invoice method is the most common and is used by all VAT citizens except Japan. When using the deduction method, at the end of an accounting period, a company calculates the value of all taxable sales, subtracts the amount of all taxable purchases, and applies the sales tax rate to the difference. The VAT deduction method is currently used only in Japan, although it, often called the "flat tax", has been part of many recent tax reform proposals proposed by US policymakers. Both methods have exceptions to the calculation method for certain items and transactions intended to facilitate tax collection or to combat tax fraud and tax evasion. The VAT amount is determined by the state as a percentage of the price of the goods or services supplied. As the name suggests, the value-added tax is intended to tax only the value added of businesses as well as services and goods that can be purchased on the market.
To understand what this means, we need to look at the production process (for example, takeaway coffee, starting with the coffee bean), where the product becomes increasingly valuable at each stage of the process.In Value-added tax in the United Kingdom Any VAT registered business on the network will charge VAT as a percentage of the sales price and refund VAT paid on the purchase of related goods and services; This means that net VAT is paid on the added value. When the final consumer makes a purchase subject to VAT, which in this case cannot be recovered, he pays VAT on the entire production process (for example, the purchase of coffee beans, their transport, processing, planting, etc.). , as prices always include VAT. The VAT imposed by the government on each business is the difference between the VAT on sales and the VAT on the purchase of goods and services that depend on the product, that is, the net value added of the business.
European Union Value Added Tax (or EU VAT) is a value-added tax on goods and services in the European Union (EU). The EU institutions do not levy this tax, but each EU member state is obliged to introduce value-added tax into national legislation by the EU VAT Code. Different EU member states have different VAT rates, ranging from 17% in Luxembourg to 27% in Hungary. The amount of VAT charged by member states is used as part of the calculation to determine each state's contribution to the EU budget. The EU VAT system is governed by several European Union directives. EU VAT is based on the “destination principle”: value-added tax is paid to the government of the country in which the consumer buying the product resides. The company selling the product collects VAT, and the buyer pays it. When the client is a company, VAT is called "input tax". When a consumer purchases a final product from a company, the tax is called "output VAT."