The concept of “value-added tax” VAT refers to the amount that governments collect for a product at each stage of its production by adding value to its selling price, and the initial production stage includes an extension to the point of sale, expresses the value paid by the consumer for the cost of production, and represents a type It is one of the types of consumption taxes because it depends on the consumption of products and not on income, and any materials that were not taxed in general in the previous stages are excluded from the value added tax. The value added tax is imposed equally on each purchase, and this type of tax is the most common in Europe, where this system is used in 162 countries.
What are the types of VAT?
The value added tax is imposed on the difference between the cost of purchasing the asset and the price that can be offered to the final consumer, and it is imposed on consumption in contrast to the rest of the taxes that are based on income. The types of value added tax are determined on the basis of the treatment of capital goods in the company, and the types of value added tax can be summarized as the following:
1- VAT on the type of consumption
The consumption tax is imposed on consumer spending on goods and services under the value-added tax for the type of consumption, and all capital goods purchased from external parties and not manufactured by the company or materials that were previously taxed in the same year of purchase are excluded, and the tax basis for such This tax is money spent on consumption.
2- VAT on the type of income
This type of tax excludes consumption tax from the tax base in subsequent years. This type does not exclude capital goods purchased from other companies from the tax base in the year of purchase. The tax base for this type of tax is net national income, and this tax includes: consumption tax and net investment.
3- VAT on the type of gross national product
This type of tax is based on the inclusion of capital goods purchased during the purchasing year in the tax base and does not exclude them, as it does not allow deduction of consumption from the tax base in subsequent years. Taxes are imposed on both consumption and total investment, and the tax basis for this type is gross domestic product.
How to collect value-added tax?
The value-added tax benefits governments by increasing the percentage of revenues that can be used to develop businesses that they provide to citizens, maintain public services, increase welfare, and so on. Governments impose value-added tax as follows:
- Manufacturing adds a specific value to the product, and this value can be determined by finding the difference between the cost of the materials used to make the product and the price that is ultimately borne by the consumer.
- The manufacturer pays the value-added tax and then includes it in the purchase price borne by the consumer.
- The manufacturer obtains a discount from the government for the value-added tax paid on the materials.
- VAT is more or less charged to the customer or retailer, is added to the final value of the product, and can be described as the price charged to customers minus the wholesale cost of the retailer’s purchase.
- Governments usually give retailers another discount for the value-added tax paid to the manufacturer.
- Retailers collect money from the buyer to reimburse the costs of taxes, which are paid at every stage of production and distribution down to the consumer or customer.
What is the importance of imposing a value-added tax?
Analysts and advocates for the imposition of a value-added tax believe that it brings revenue to the government, which contributes to a number of things, the most important of which are:
Supporting development, research, and maintenance operations.
Contribute to the provision of public services to citizens.
The value-added tax is a tax that does not impose new taxes on the wealthy and is not as burdensome as income tax.
VAT is simpler than the conventional sales tax, with a distinct difference in collection and compliance issues.
What are the pros of imposing a value-added tax?
Since the value-added tax has become common in many countries, it has become necessary to know the benefits and advantages of imposing it, and the following are the most prominent of them:
- Encouraging personal savings and investment.
- Assist in revenue formation, as the VAT cost is collected on small portions at different stages of production.
- Helping governments collect the revenues needed to carry out activities related to society and infrastructure service.
- The value-added tax depends on the value added at each stage of production and not on the total price, so there is no increase in the price as a result of the value-added tax.
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