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I always saw VAT as a sales tax that only applies to individuals. When a company buys something it doesn't pay VAT, but it pays it when selling to end-users.

by jopsen 9y ago

I always saw VAT as a sales tax that only applies to individuals. When a company buys something it doesn't pay VAT, but it pays it when selling to end-users. Benefit being that if companies A sells a half finished product to company B and company B sells it to a consumer then VAT is only paid once. Where as simple sales taxes would apply to transactions between company A and company B. Thus, incentivizing the formation of a conglomerate company AB consisting of both A and B. Reducing competition and flexibility, favoring big players over small. Am I wrong?

xyzzyz 9y ago
Yes, you are completely wrong. This is rather how sales tax works. With VAT, you do pay it on every link of the chain, but then businesses are allowed to recoup it on their purchases, while end-users are not. For example, if you are making and selling chairs, you pay VAT on the wood you are buying, and your buyer is also paying VAT on the chairs they buy from you. However, you are allowed to deduct the VAT you paid for wood from the VAT owed to the government by selling chairs. To make it concrete, suppose you buy wood for $1000, and sell chairs for $2000. Suppose VAT rate is 22%. Then you actually pay $1022 to wood wholesalers, and sell your chairs for $3066. Your sale of the chairs makes you owe $66 to government, but the invoice you got from wood wholesalers allows you to deduct from your tax bill the $22 you already paid when you bought wood, and in the end you only owe $44, which is exactly the 22% of the value you added ($3000-$1000 = $2000).
- jopsen 9y ago
  Deduct and not pay are the same. Aren't they?
  - xyzzyz 9y ago
    No, because each part of the chain has to cut a check to the government for the tax obligation created at their part of the chain, while in sales tax system, only the final retailers have to do it. As a chair manufacturer, you don’t use the invoice from wood wholesaler to deduct their whole tax obligation, just a part of it.

by jopsen 9y ago

xyzzyz 9y ago

Yes, you are completely wrong. This is rather how sales tax works. With VAT, you do pay it on every link of the chain, but then businesses are allowed to recoup it on their purchases, while end-users are not. For example, if you are making and selling chairs, you pay VAT on the wood you are buying, and your buyer is also paying VAT on the chairs they buy from you. However, you are allowed to deduct the VAT you paid for wood from the VAT owed to the government by selling chairs. To make it concrete, suppose you buy wood for $1000, and sell chairs for $2000. Suppose VAT rate is 22%. Then you actually pay $1022 to wood wholesalers, and sell your chairs for $3066. Your sale of the chairs makes you owe $66 to government, but the invoice you got from wood wholesalers allows you to deduct from your tax bill the $22 you already paid when you bought wood, and in the end you only owe $44, which is exactly the 22% of the value you added ($3000-$1000 = $2000).

jopsen 9y ago
Deduct and not pay are the same. Aren't they?
- xyzzyz 9y ago
  No, because each part of the chain has to cut a check to the government for the tax obligation created at their part of the chain, while in sales tax system, only the final retailers have to do it. As a chair manufacturer, you don’t use the invoice from wood wholesaler to deduct their whole tax obligation, just a part of it.