1、 Value added tax From Wikipedia， the free encyclopedi Abstract A value added tax(VAT)is a form of consumption tax It is a tax on the” value added” to a product or material， from an accounting view, at each stage of its manufacture or distribution The” value added” to a product by a business is the s
2、ale price charged to its customer， minus the cost of materials and other taxable inputs A VAT is like a sales tax in that ultimately only the end consumer is taxed It differs from the sales tax in that， with the latter， the tax is collected and remitted to the government only once at the point of pu
3、rchase by the end consumer With the VAT, collections， remittances to the government， and credits for taxes already paid occur each time a business in the supply chain purchases products from another business. The reason businesses end up paying no tax is that at the time they sell the product，they r
4、eceive a credit for all the tax they have paid to suppliers Personal end-consumers of products and services cannot recover VAT on purchases， but businesses are able to recover VAT(input tax)on the products and services that they buy in order to produce further goods or services that will be sold to
5、yet another business in the supply chain or directly to a final consumer In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products， and most of the cost of collecting the tax is borne by business， rather th
6、an by the state Value Added Taxes were introduced in part because they create stronger incentives to collect than a sales tax does Both types of consumption tax create an incentive by end consumers to avoid or evade the tax But the sales tax offers the buyer a mechanism to avoid or evade the tax-per
7、suade the seller that he is not really an end consumer， and therefore the seller is not legally required to collect it The burden of determining whether the buyer S motivation is to consume or re-sell is on the seller but the seller has no direct economic incentive to the seller to collect it The VA
8、T approach gives sellers a direct financial stake in collecting the tax， and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumerChapter I Comparison with a sales tax Value added tax(VAT)avoids the cascade effect of sales tax by taxing only the value
9、 added at each stage of production For this reason， throughout the world， VAT has been gaining favor over traditional sales taxes In principle， VAT applies to all provisions of goods and services VAT is assessed and collected on the value of goods or services that have been provided every time there
10、 is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government If however, the purchaser is not an end user， but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it c
11、harges to its customers The government only receives the difference； in other words， it is paid tax on the gross margin of each transaction， by each participant in the sales chain Sales tax is normally charged on end users(consumers) The VAT mechanism means that the end user tax is the same as it wo
12、uld be with a sales tax The main difference is the extra accounting required by those in the middle of the supply chain； this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, redu
13、cing the effort required to check and certify their status When the VAT system has few, if any, exemptions such as with GST in New Zealand， payment of VAT is even simpler. A general economic idea is that if sales taxes exceed 1 0， people start engaging in widespread tax evading activity(1ike buying
14、over the Internet， pretending to be a business， buying at wholesale， buying products through an employer etc. On the other hand total VAT rates can rise above 1 0 without widespread evasion because of the novel collection mechanism However， because of its particular mechanism of collection， VAT beco
15、mes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states. 1.1 Principle of VAT The standard way to implement a VAT involves assuming a business owes some percentage on the price of the product minus all taxes previousl
16、y paid on the good. If VAT rates were 10， an orange juice maker would pay 10 of the 5 per litre price ( 0.50)minus taxes previously paid by the orange farmer(maybe 0.20) In this example， the orange juice maker would have a 0.30 tax liability. Each business has a strong incentive for its suppliers to
17、 pay their taxes， allowing VAT rates to be higher with less tax evasion than a retail sales tax Behind this simple principle are the variations in its implementations， as discussed in the next section 1.2 Basis for VATs By the method of collection. VAT can be accounts-based or invoice-based. Under t
18、he invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales(output tax)， consider the tax on the purchase invoices as input tax and can deduct the sum fro
19、m their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed， in the case of negative liability). Under the accounts based method， no such specific invoices are used Instead， the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method.
