All Need to know in worst 2 taxes – Sales tax and VAT

Sales tax and VAT

As an American said: Two certain things in life – Death and taxes

Sales tax is collected by the retailer when the final sale in the supply chain is reached via a sale to the end consumer. End consumers pay the sales tax on their purchases. Businesses issue resale certificates to their sellers when buying business supplies/inputs that will be resold since sales tax is not due. Tax jurisdictions do not receive the tax revenue until the sale is made to the final consumer. Sales tax and VAT

VAT (Value-Added-Tax) is collected by all sellers in each stage of the supply chain. Suppliers, manufacturers, distributors and retailers all collect the value added tax on taxable sales. Suppliers, manufacturers, distributors, retailers and end consumers all pay the VAT on their purchases. Businesses must track and document the VAT they pay on purchases that will be resold in order to receive a credit for the VAT paid on their tax return. Tax jurisdictions receive the tax revenue throughout the entire supply chain as opposed to at the sale to the final consumer chain.

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The sales tax system is relative simple, the VAT systems is suspect to fraud by entities in the chain to the final customer. Here is the evidence:

VAT places a set percent tax on the sale/resale of a good as it moves along the supply chain, meaning as value is added to the good. For example, let’s say the VAT rate is 10% and you are buying a cake at the grocery store. Here’s how VAT would work:

  • Business B, the baker, buys $5 worth of ingredients from the a manufacturer, Business A. Business B pays Business A $5.50, which is $5 for the ingredients plus a 10% VAT, or $0.50, which Business A will pay to the government.
  • Business B then “adds value” to the ingredients buy turning them into a cake, and then sells the cake to Business C, the Cakery, for $7. Business C pays Business B $7.70, which includes $0.70 tax. Business B will pay VAT to the government, only for the value that it added to the good, which is represented by difference between the two tax amounts. That would be $0.70 minus $0.50, which is $0.20. Business B pays $0.20 VAT to the government. It pockets the other $0.50, in case you are wondering.
  • You go to the Cakery and buy that cake for $10. You pay Business C $1 in tax, which is 10% of $10. Business C pays the government $0.30 in VAT, which represents the value it added in the supply chain, calculated by $1 minus $0.70. Business C pockets the other $0.70.

Who collects and remits the tax?

For both sales tax and VAT, the seller is responsible for collecting the tax and remitting to the appropriate tax authority though there are cases where the buyer must recognize the tax instead.

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InvoicingSales tax and VAT

  • Sales tax: The seller should separately state sales tax.
  • VAT: The seller should separately state VAT and include registration number for a VAT invoice, however, in most VAT jurisdictions prices are tax inclusive.

Who pays the tax?

  • Sales tax: The final consumer.
  • VAT: All purchasers however the economic burden of VAT is on the final consumer as they do not have the right to deduct input VAT.

Taxability of purchases by business

  • Sales tax: Resellers issue an exemption certificate to the vendor and do not pay tax on purchases of items to be resold.
  • VAT: Resellers pay tax to the vendor and reclaim the VAT for the tax amount paid on business inputs.
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Audit sticking points

  • Sales tax: Vendors that sell to resellers must keep valid exemption certificates on file or risk audit assessment turning exempt sales into taxable sales.
  • VAT: All parties must keep invoices for purchases documenting VAT paid in order to get the reclaimed VAT. Review of transactions where zero or reduced rate VAT was paid and the reasons for this.

Also read: VAT  – Sales tax

Sales tax and VAT

Sales tax and VAT

Sales tax and VAT Sales tax and VAT Sales tax and VAT Sales tax and VAT Sales tax and VAT Sales tax and VAT Sales tax and VAT

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