Information About VAT
VAT, or "value added taxes," are taxes built into the cost of all the goods and services sold in an economy. Although other countries use VAT as well, the most prominent user of VAT is the European Union. All 26 member states of the EU use VAT as a main component of their tax system.
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Goods and Services
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Value added taxes are attached to the sale price of all goods and services, although special arrangements can be made for some used goods, farm products and antiques. They are different from U.S. state and local sales taxes as they rarely appear separately on a bill of sale and are usually kept as a national responsibility, rather than a local one. Many countries now use the value added tax scheme because of its uniformity and convenience when compared with a more local sales tax program. VAT schemes provide credits for all producers and consumers of goods not considered "final." This virtually eliminates the threat of double-taxation.
History
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Value added taxes were first developed in France in 1954 by the tax administrator Maurice Laure. The rest of Europe warmed to the system and adopted it in 1967. It quickly became popular throughout the world because of its simplicity. It is popular throughout Africa and Asia, with India and China being huge believers in the scheme.
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Tiered Rates
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Most EU states have staggered rates of VAT for various goods and services. Goods considered essential to life, like bread, water and vegetables, are taxed at a very low rate. In Spain this rate is as low as 4 percent. Other goods that are considered only moderate needs like haircuts and cinema tickets are taxed at a "middle" rate. Other goods, especially gasoline, cigarettes, alcohol and luxury items, are taxed at high rates, ranging from 12 to 25 percent.
Built In vs. Outside
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The VAT applies to goods and services in every stage of production. This means that in the construction of a car, for example, all the firms involved, from the firm that mines iron ore to the dealership that retails the finished product, pay VAT. The difference is that all these players, apart from the final consumer, apply for input tax credits that refund the costs of the VAT that was paid.
Other Places That Use VAT
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South Africa, Namibia, Morocco, Mongolia, Israel, Sri Lanka and Taiwan all use the value added tax system. Their use helps simplify the tax calculations incurred by international trade, as only end retailers and their foreign customers need worry about making any VAT payments.
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References
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- Photo Credit taxe petroliere image by margouillat photo from Fotolia.com
