Value Added Tax (or VAT) is a form of indirect tax. It is a general consumption tax. Generally, t is imposed on most supplies of goods and services with few exemptions that are bought and sold. VAT is charged at each stage of the ‘supply chain’ from producer to consumer. It is charged incrementally at each stage from the production to the consumption based on the value added at each stage.
Following table describes how VAT is charged at each stage of a supply chain, how it is collected and the effect of the tax on the players at each stage – from raw material producer to the manufacturer, to distributor to the retailer and finally to consumer.
|Person||Details||Cost Price excluding VAT||Margin and Value addition||Sales Price||5% VAT on Sales||Invoice Amount||VAT recovered on purchases||Net VAT Payable||Marginal VAT|
|Raw Material Produce||1st Stage||1000||50||1050||0||50||50 (No input VAT )|
|Manufacturer||Adds his own margin on base price of the goods||1000||500||1500||75||1575||50||25||25|
|Distributor||Adds his own margin on base price of the goods bought from manufacturer||1500||1000||2500||125||2625||75||50||50|
|Retailer||Adds margin on goods bought from Distributor||2500||500||3000||150||3150||125||25/td>||25|
|Consumer||Directly consumes the goods and hence purchase price will be cost price + VAT||3150|
As you can see in the above, the consumer is not selling the goods further. So, payees and bears the entire VAT burden.
- Producer’s Cost: AED 1000/-
- Total Margin (column 4): AED 2000/-
- Total Cost to consumer: AED 3000/-
- Total VAT paid by consumer: AED 150/-
- Total cost including VAT to consumer: AED 3150/- (Invoiced to him by retailer)
Ultimately, consumer is bearing VAT cost, but it is paid to government at different stages by different persons, who in a way act as a tax collector on behalf of the government.
Also notice that the Net VAT payable (Column 9) is equal to the total of VAT on margin added at each stage (Column 10). At each stage the seller charges as VAT on his sales and collects it from his customer. However, he deducts the the amount of VAT paid till the last stage (the VAT paid by him on his purchase) and pays the net VAT to the Government. VAT payable by a seller is only on the value added and on the margin he earned by him. That is why it is known as VALUE ADDED TAX (VAT).
Depending on the industry and how the product are marketed and sold there can many stages in a supply chain.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.