Why value added tax

In the United States, a federal VAT could also create conflicts with state and local governments across the country, which currently set their own sales taxes.

Critics note that consumers typically wind up paying higher prices with a VAT. While the VAT theoretically spreads the tax burden on the added value of a good as it moves through the supply chain from raw material to final product, in practice, the increased costs are typically passed along to the consumer.

A value-added tax VAT is a flat tax levied on an item. It is similar in some respects to a sales tax, except that with a sales tax, the full amount owed to the government is paid by the consumer at the point of sale. With a VAT, portions of the tax amount are paid by different parties to a transaction. The federal government raises money primarily through the income tax system.

The states and local governments establish and collect their own sales taxes. Local governments rely primarily on property taxes. Wealthier consumers could ultimately come out ahead if a VAT replaced the income tax. In short, lower-income consumers would pay a much higher proportion of their earnings in taxes with a VAT system, critics including the Tax Policy Center charge.

Yes, to some extent. A government can exclude certain basic household goods, food products, or medicines from the VAT, or it can charge a substantially lower VAT rate. It also can provide rebates or credits to low-income citizens to offset the effects of the tax.

International Monetary Fund. Accessed Feb. Ateneo Law Journal. Accessed Aug. Senate of the Philippines. European Commission. TMF Group. Congressional Budget Office.

Brookings Institution. Tax Laws. Income Tax. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.

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Measure content performance. Give Us Feedback. Share Tweet Share Email. Related Articles. Cigarette Taxes in Europe September 2, Value-added Taxes in the Pandemic February 1, Sparkling Wine Taxes in Europe December 28, The measure appears drastic when you consider that the performance of VAT in Zambia has been relatively good contributing the second largest share of revenue to the treasury over the last five years.

See figure 3 ZRA Given the buoyance of VAT what motivated such a drastic response to the refund problem? The motivation for the policy change seems to emanate more from an urgent need for revenue.

The country is currently experiencing rising fiscal demand from mounting debt obligations, an ambitious infrastructure development drive and pressure from social spending which is putting a strain on the public purse. This coupled with a strong sense that the mining sector, the biggest exporter and hence the primary recipient of the VAT refunds, is not paying its fair share of taxes. Government in the hunt for quick revenue gains has identified the elimination of VAT refunds as a quick win.

Unfortunately, instead of plugging the leak, this decision might burst the dam. With the removal of the self-enforcing mechanism that makes VAT so effective, tax evasion is likely to increase across all sectors, leading to greater declines in revenue. Cost of production is also likely to rise as firms further down in the supply chain factor in the cost of the sales tax into their prices.

One major exporter has estimated that the cost of production is likely to go up by at least 20 percent Lusaka Times, For the domestic consumer prices are also likely to rise leading to a higher cost of living for the ordinary Zambian. A better policy response would be to reform the VAT refund system rather than replace the entire VAT system with a non-refundable sales tax.

Finally, the Zambian government needs to reign in excessive expenditure to minimise pressure on the revenue side of the budget. Ultimately, the retail consumer pays the VAT. The buyer in each earlier stage of the product's production is reimbursed for the VAT by the subsequent buyer in the chain.

VAT is commonly used in European countries. The U. VAT is commonly expressed as a percentage of the total cost. A VAT system is often confused with a national sales tax. But a sales tax is only collected once—at the final point of purchase by a consumer. So, only the retail customer ever pays it. The VAT system is invoice-based and is collected at multiple points during the production of a finished product.

Each time value is added, a sale is made and a tax is collected and remitted to the government. A manufacturer of electronic components purchases raw materials made out of various metals from a dealer.

The metals dealer is the seller at this point in the production chain. The manufacturer sends 10 cents of the VAT it collected to the government and keeps the other 10 cents, which reimburses it for the VAT it previously paid to the metals dealer. It pays 10 cents of the VAT to the government. The other 20 cents reimburse the cell phone manufacturer for the VAT it has paid to the electronic components manufacturer.

The standard VAT in the U. There is no VAT on some items such as food and children's clothing. Financial and property transactions also are exempt.

Those who favor value-added taxation argue that a VAT system discourages attempts to avoid taxes. The fact that VAT is charged and recorded at each stage of production rewards tax compliance and acts as a disincentive to operating in the underground market.