All over the financial and business space, knowledge of the tax system comes in handy in determining tax deductions, allowances and other benefits and deductions that individuals and businesses can take advantage of. It is one of the widely discussed concepts in the subject of taxation & tax. VAT is a type of tax, but it is a special and unique type of tax which confuses taxpayers and businesses. 

This article is going to look at the difference between VAT and taxation, in-depth comparisons between the two, an explanation of VAT and facts about the taxation laws regulating both concepts.

What Is VAT?

An indirect tax levied on goods and services at every stage of production or distribution, Value Added Tax (VAT) is primary on the basis of consumption. In other words, VAT is levied at each stage of the supply chain, from production to final sale in the retail sector, yet the final consumer is the real taxpayer. Businesses that operate in the supply chain act as agents for the government to collect the VAT.

But unlike conventional sales tax  which is applied only at sale, VAT is paid incrementally. For instance, VAT is charged on raw materials when the manufacturer purchases them. When the manufacturer sells the finished product to a wholesaler, VAT is charged again, but the manufacturer can claim back the VAT paid on the raw materials. Wholesalers and retailers, likewise, can recover the VAT they incur on their purchases.

VAT systems are also common in most of the world, especially the EU, Canada and many developing countries. EU actually has VAT taxes ranging anywhere from around 5% to 27%, depending on the country and specific goods or services.

Taxation Explained: General Overview of Taxation Laws

Conversely, taxation is the process through which governments charge individuals, businesses, and other entities financial tributes. These taxes are vital for raising money to pay for public goods and services including infrastructure, education, healthcare and national defense.

Depending on the country and the specific tax in question, taxation laws which govern how taxes can be placed and collected can vary significantly. Taxes fall into two main categories:

1. Direct Taxes: Taxes paid directly to the government by individuals or organizations based on their income or wealth. Examples are income tax, corporate tax and property tax.

2. Indirect Taxes: The taxes are collected by intermediates like businesses and are then forwarded to the government. Some of the significant examples of indirect taxes include value added tax (VAT), excise duties, sales taxes etc.

VAT is just one among many different tax systems, each with their own rules, exemptions and rates. They may be taxes on income or property, sales and corporate profits, and these are governed by taxation laws in respective countries.

VAT vs Taxation: Key Differences

Although VAT is included as general taxation, there are some big differences between tax (general taxation) and VAT. Let’s unpack some of these differences to better understand how they work:

Tax Collection Process

• VAT System: VAT stands for Value Added Tax; it is a multi-stage or consumption tax levied on the sale of goods and services. They collect VAT from the customers on the selling price of the goods and services and deposit it to the government. This system is beneficial to the business because they only pay VAT on the “value added” at each stage, preventing tax on tax and cascading tax.
• General Taxation: General taxation can be both direct and indirect taxation. With income tax, for instance, the government takes taxes directly from individuals or businesses according to their income. For indirect taxes, the government will usually depend on intermediaries (retailers, etc.) to collect the tax on its behalf.

Application and Scope

• VAT System: Goods and Services are subject to VAT in the economy business. In certain nations, specific basic products and administrations (for instance, sustenance and human services) can be excluded from VAT or charged a lower rate, to balance out the weight on buyers.
• General Taxation: General taxation, on the other hand, covers more than one tax area, such as income tax, property tax, and corporate tax each requires a separate calculation and different conditions for the obligation to pay. Income tax, for example, is determined depending on an individual or corporation’s income level, while property tax depends on the worth of real estate owned.

Burden of Taxation

• VAT System: In this system, tax is paid by the consumers. The tax is, however, collected by businesses that serve as intermediaries in the collection. The businesses in the supply chain can often claim a credit in the system for the tax they paid on inputs.
• General Taxation: General taxation is borne differently depending on the type of tax. In the case of direct taxes like income tax, the tax burden is directly on the taxpayer. Indirect taxes such as sales tax and VAT, the consumer is the end entity responsible for paying the tax.

Complexity and Administration

• VAT System: The VAT system is simpler to administer. For example, when it comes to exports of goods, VAT is often refunded or waived to give businesses a competitive edge. Moreover, businesses would need to maintain records of the sales and the VAT charged and paid to claim any input tax credits.
• General Taxation: Through general taxation systems can also be complicated (particularly in nations with progressive income taxes), VAT typically requires greater documentation and compliance from businesses. In the case of direct taxes, it is normally up to the individual or enterprise to file returns properly and pay taxes owed.

Tax Differences: VAT vs Other Taxes

VAT is only one facet of a nation’s comprehensive taxation scheme, and when juxtaposing VAT with other kinds of taxation, there are crucial tax differences:

1. Income Tax vs VAT

Income tax is a direct tax based on the earnings of the taxpayer, either through a salary or profits. On the other hand, VAT is an indirect tax on consumption because it is incorporated into the price of the good and services and is not directly associated with the income of the consumer.

2. Sales Tax vs VAT

The main difference between sales tax and VAT comes in how each one is applied  both are consumption taxes. Sales tax is usually added only at the end point of sale (when the consumer buys the product) whereas VAT is charged incrementally at each stage of the supply chain. This can add complexity to VAT but makes it less vulnerable to tax cascading.

3. Property Tax vs VAT

Property tax is a direct tax levied on the ownership of real estate, while VAT entails tax paid at the point of purchase for goods and services. Property tax is a recurring tax on property based on the value of the property owned, whereas VAT is only found on the sale of goods and services and does not apply to assets such as land or buildings.

Conclusion

Ultimately, VAT is a component of taxation but is separate from it in terms of generalist association. VAT is a type of indirect tax that is a consumption tax placed on a product whenever value is added at each stage of production and final sale. Taxation, on the other hand, refers to a system of compulsory contributions imposed by government authorities on individuals and organizations for various purposes, including funding public services, infrastructure projects and social programs. VAT and taxation in the businesses is the first step for compliance. By reading this article , you will better understand the operations of these two systems, how they will have an effect on consumers, and the obligations that businesses must comply with, depending on your locality.