What is the scope of the value–added tax?
Answer
.
\n
Value Added Tax – a VAT – is a common system of taxation many places. At first it seems similar to, but in reality is very different, to a sales tax. Canada uses one in it’s system. There are certainly differences, especially in how it is collected, in the systems using it but the basic idea is: Tax the change in value a business endeavor gets from sale of it’s product. Unlike the US income tax, tax the real gross mark up rather than the business income net of expenses.\n
.
\n
Essentially, a business buys something for $1, (it could be a combination of purchases to make a product), it then sells that product for $1.20. It added .20 of value to the product. it owes, or collects and pays over, a tax on that amount. The final product actually has tax paid on the entire $1.20, but the parties collecting each portion of that are really responsible for the tax on their piece. Frequently, the tax on the full amount is collected at each sales point, and a credit is taken for the tax paid on the purchase by the one collecting and paying over the amount on the next sale. (Which is why it may appear like a sales tax we are familiar with). In the example above, presuming a 10% VAT, the business would buy the $1.00 item and pay it’s supplier $1.10 with VAT. It would sell the item for $1.20 but collect $1.32 with VAT. It would have to pay over that $.12 (like a sales tax collecion here), but instead claims a credit for the $.10 it paid on it’s purchase, and only pay over the $.02 difference, which equals 10% of it’s $.20 mark up.