Everyone has to pay taxes, and there generally is no evasion from it. However, when we spend a lot of our hard-earned money on taxes, it becomes essential to understand the different types of taxes and when we pay them.
Two of the most critical taxes often confused are Sales tax and VAT. The significant difference between Sales and VAT taxes is that the former is charged when the product reaches the customer, while the latter is charged during every production phase.
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Key differences
Sales tax
- It refers to a tax charged on the sales of goods and services. The main feature of this tax is that it is set on the final goods or services and their absolute value.
- This tax burden usually falls onto the customer buying the goods or services.
- Since this tax is charged to the final goods and services and not to their different production levels, the cascading effect is considered absent in this tax.
- Another notable feature of this tax is that it is charged only once, which is also referred to as a single-point tax.
VAT
- It stands for Value Added Tax, and as the name suggests, it is charged every time there is some value addition. Every time there is a new phase of production that enhances and increases the value of the product, this tax is charged on the amount that has been added.
- The burden of this tax falls onto anyone who buys the concerned product and sells it again to someone else. It can be said that this tax burden is rationalized.
- Since this tax is charged every time there is some form of value addition and not at the time of final goods, the cascading effect is considered present in this tax.
- This tax is also termed a multiple-point tax, and this is because this tax is charged numerous times.
The Comparison Between Sales Tax And Vat
| Parameter | Sales tax | VAT |
|---|---|---|
| Meaning | It refers to a tax charged on the final goods and services. The process of taxation of this tax takes place when the goods and services reach the last customer. | It is an abbreviation for Value Added Tax, which is a tax charged at every stage of a product’s production cycle or as the product passes through the stages of the supply chain. |
| Charged on | Since this tax is charged on the final goods and services, this tax is charged upon the total value of the product. | Since this tax is charged on various stages, this tax is charged upon the amount that has been added to the product after it passes from one step to another. |
| Paid | The notable feature of this tax is that it is always paid once. This is because of the fact that this tax has to be paid only when the product reaches the final customer. | This tax must be paid multiple times, as whenever there is a value addition, these taxes must be paid on the concerned amount. |
| Nature | Since these taxes have to be paid only once, these are also referred to as single-point or single-stage taxes. | Since these taxes must be paid multiple times, these are also referred to as multi-point or multi-stage taxes. |
| Burden | The final customer of the concerned product or service must bear the burden of these taxes. | The burden of these taxes has to be borne by everyone who is a part of the supply chain. Moreover, as the product goes from one stage to another of the supply chain, each member of it has to pay a small amount of tax as value addition. Thus, the burden of these taxes is also considered rationalized. |
| Cascading effect | Since this tax has to be paid only once, the cascading effect is absent in the case of this tax. | Since this tax has to be paid multiple times, the cascading effect is present in the case of this tax. |
| Calculation | The calculation and accounting of this tax are more straightforward than VAT because this tax must be paid only once. | The calculation and accounting of this tax are pretty tricky as this tax has to be paid multiple times. |
| Documentation | These taxes require less documentation than VAT as the documents must be prepared when the taxes are paid, which happens on the final goods. | These taxes require more documentation than Sales tax as these have to be paid many times, thus more documentation. |
| Tax evasion | Since these taxes require lesser documentation than VAT, there are more chances of tax evasion happening in the case of these taxes as the taxes have to be paid only once. | Since these taxes require strict documentation, and at every and all stages of the supply chain, there are fewer chances of tax evasion as these taxes have to be paid multiple times. |
| Applies to | These taxes apply to the whole nation. | These taxes do not apply to the whole nation. Their rules and regulations vary from state to state. |
Major Differences Between Sales Tax and Vat
What Exactly Is Sales Tax?
It can be best described as a tax charged on goods and services when they have been entirely manufactured and reached their final customer. The notable feature of this tax is that it is always charged a single time and is also referred to as a single-point tax.
Since it is charged only once, this tax’s cascading effect is absent. Calculating this tax is generally straightforward as it is charged once, and that too on final goods or services. This tax burden falls onto the customer, which applies to the whole nation.
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Key takeaways: Sales tax
- It refers to a tax that applies to the whole nation and is charged on final goods and services, meaning the goods and services that have passed their stages of production. No matter how often there is value addition in the goods and services, this tax will be charged when the product becomes entirely manufactured.
- The trademark feature of this tax is that it is only charged once, i.e., when it reaches the final customer. Hence, it is also referred to as a single-point or single-stage tax. Since this tax is charged a single time, its calculation also becomes more manageable.
- The cascading effect in the case of this tax is generally absent because of the fact that this tax is always charged a single time.
- This tax burden falls onto the customer when the product finally reaches him.
- One of the other essential features of this tax is that its evasion is possible under some circumstances.
What Exactly Is Vat?
It is an abbreviation for Value Added Tax. It can be best described as a tax charged at every step of the supply chain whenever there is some value addition in the products concerned. The trademark feature of this tax is that it is charged multiple times and is also known as a multi-point or staged tax.
The calculation of this tax is considered pretty tricky as it has to be calculated whenever there is a value addition. Therefore, when it comes to its burden, it is deemed rationalized. This tax varies from state to state.
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Key takeaways: VAT
- It stands for Value Added Tax and refers to a tax charged at every step of the supply chain whenever there is a value addition in the product. Whenever a product passes through various production phases, this tax will be charged every time there is an increase in the product’s value after it goes from one stage to another stage of the supply chain.
- The hallmark feature of this tax is that it is always multiple times, i.e., whenever there is a Value addition. Hence, it is also referred to as a multi-point or state tax. Since this tax is charged multiple times, the calculation of this tax is also considered pretty tricky.
- The cascading effect in the case of this tax is present because this tax is always charged multiple times.
- This tax burden falls onto multiple people in the supply chain, such as manufacturers, wholesalers, retailers, customers, etc.
- The evasion of this is impossible under every circumstance.
The Contrast Between Sales Tax And Vat
Meaning
- Sales tax – It can be best described as a tax that is charged on various goods and services when the final sale to customers is made. This tax is charged on final goods and services that have completed their production cycle and value addition.
- VAT is an abbreviation for Value Added Tax and can be best described as a tax charged every time a product or service passes a stage of the supply chain, and there is some form of value addition. This tax is not charged on final goods and services but on the amount that has been added as the product moved from one stage to another.
Charged on
- Sales tax – Since this tax is charged on the final goods and services, it is charged on the total value or amount of the concerned goods and services.
- VAT – Since this tax is charged as the goods and services move through the supply chain or production processes stages, it is charged on the value added.
Paid
- Sales tax – This tax is only paid once because this tax is charged only on the amount of the final goods and services.
- VAT – This tax is paid multiple times when a value is added to the goods and services.
Nature
- Sales tax – Since this tax is paid only once, it is called Single point or stage tax.
- VAT – Since this tax is paid multiple times, it is also called Multi-point or state tax.
Burden
- Sales tax – The final customer who buys the concerned goods and services has to bear the burden of this tax. Not everyone in the supply chain has to bear this tax burden, but the final customer.
- VAT – The burden of this tax is considered rationalized because everyone who is a part of the supply chain has to bear the tax burden. When a manufacturer manufactures a product, he sells it to the wholesaler, then he sells it to the retailer, and finally, the retailer sells it to a consumer. Everyone, manufacturer, wholesaler, retailer, and customer, has to pay some amount of this tax.
Cascading effect
- Sales tax – Since this tax is only paid, and not multiple times. Thus, the cascading effect is typically absent in the case of this tax.
- VAT – Since this tax is paid multiple times and not a single time. Thus, the cascading effect is present in the case of this tax.
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What Is Meant by The Cascading Effect?
The cascading effect can be best described as a tax levied on a product at all and every stage of the supply chain. For example, if the value of product X was $100 in the manufacturing stage and till the product came to the distribution stage, the value of the same product was $300, then the tax would be charged onto the amount that has been added, i.e., $200.
Documentation
- Sales tax – This tax requires less documentation than VAT, and the reason behind this is that this tax has to be paid by the final customer, and all the necessary documentation is prepared then only.
- VAT – This tax requires more documentation in comparison with Sales tax, and this is because these taxes have to be paid at every stage of production or supply chain, and all the documents have to be prepared at every stage.
Calculation
- Sales tax – The calculation and accounting of this tax are easier than the accounting of VAT, as these taxes have to be paid only once.
- VAT – The calculation and accounting of this tax are more difficult than the accounting of Sales tax, as these taxes have to be paid many times.
Tax evasion
- Sales tax – Since these taxes require lesser documentation than VAT, there are more chances of tax evasion to happen in the case of these taxes.
- VAT – Since these taxes require strict documentation, and that too, at every and all stages of the supply chain, there are fewer chances of tax evasion.
Applies to
- Sales tax – One of the notable features of these taxes is that these taxes apply to the whole nation, and generally, the tax rates also stay the same for the whole nation.
- VAT – These taxes do not apply the same way to the whole nation. Instead, it is up to the different states to decide the various rules and regulations regarding these taxes.
CONCLUSION
Sales tax and Value Added Tax (VAT) often confuse people, and the terms are used interchangeably. However, the major difference between Sales tax and VAT is that the former is charged only once by the final customer of the goods and services.
In contrast, the latter is charged multiple times as the product passes through various stages of the supply chain or every time there is some form of value addition.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q1. Who has to pay VAT?
This tax has to be paid by everyone who is a part of the supply chain. Whenever there is an addition in the value of a product as it passes through the production and supply chain stages, it has to be paid by the concerned individual,
Q2 Who has to pay Sales tax?
The final customer or owner of the concerned goods and services must bear this tax burden.
Q3. What is meant by cascading effect?
The cascading effect refers to the tax imposed on the same goods and services but at different stages. VAT is a major example of this effect.
Q4. What are the major differences between Sales tax and VAT?
The major differences between Sales tax and VAT are that the former is applied to the final value of a product, requires less documentation, and applies to the whole nation. In contrast, the latter is applied to the value-added, requires more documentation, and does not apply to the whole nation.
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Business, marketing, and blogging – these three words describe me the best. I am the founder of Burban Branding and Media, and a self-taught marketer with 10 years of experience. My passion lies in helping startups enhance their business through marketing, HR, leadership, and finance. I am on a mission to assist businesses in achieving their goals.