Taxes have become mandatory around the world. There is no clear evidence when actual taxation system began and how it spread around the world. More formal tax systems were created by British Colonial Rules in their empire which was also used as a means to suppress the indigenous people by exploiting their earnings via stringent tax systems.
There are currently 2 types of taxes applied on goods majorly across the globe.
1. Taxes on Sale of Goods to end customer
2. Values Added Tax (VAT) or Good and Services Tax (GST)
1. Taxes on Sales of Goods to End Customer or Sales Tax:
This is the tax applied on the final retail price of the goods i.e when the final finished good is sold to the customer or the consumer. In this case the goods at source, manufacturer, wholesaler, distributor are not taxed. Such taxes are collected as a percentage on the final value of goods sold and there could be multiple taxes applied such as state, central, luxury, sin taxes, etc. This leads to inflation of price at point of sale.
But this process also simplifies tax collection as there is only one point where tax is collected in the entire supply chain but to control tax evasions the retail industry should be an organised sector like in case of developed countries like USA, UK, etc. Such taxes are difficult to be applied in a country where unorganized retail in more prevalent like in case of India, Bangladesh, etc.,
Let us see a simple example of sales tax applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $25 each. The retailer buys them from manufacturer directly. He then sells them for $38.5 each after applying 35% margin. If there is a discount then the taxes are applied on the discounted values of the goods sold.
Manufacturer to Retailer : 25 x 2 = $50
Sale of Goods : 38.5 x 2 = $76.9
State Tax 5% : 76.9 x 0.05 = $3.85
Central Tax 3% : 76.9 x 0.03 = $2.31
Sin Tax 4% : 76.9 x 0.04 = $3.08
TOTAL VALUE PAID BY CUSTOMER : $86.13
TOTAL TAX COLLECTED : $9.23
This tax amount collected is paid to the government as part of tax returns quarterly or more frequently based on respective country's finance policy.
2. VAT or GST:
This is the tax that the seller collects on the incremental value of good from the buyer. The major difference between sales tax and VAT is that Sales tax is applied only on the final price of the product that the consumer pays to the retailer and VAT is a stage wise application of tax on the value add all the way from manufacturer up till the consumer. In both the cases consumer is the one that bears the burden.
VAT and GST's definition is similar and the difference can only be made based on the application defined by the government. Some institutions apply VAT on tangible products and apply service tax on intangible services rendered to customers. GST is usually a blanket tax applied across tangible and intangible goods and services on the value added amount. In case of VAT or GST it is always included in the selling price unlike sales tax which are applied on the selling price.
Let us see a simple example of how VAT can be applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $28 each. VAT applied is 12% i.e. $3. The retailer buys them from manufacturer directly, he buys them for $25 + $3 VAT. He then sells them for $43 each after applying 35% margin and 12% VAT on net retail. If there is a discount then the VAT/GST is applied on the discounted values of the goods sold minus the landed cost.
Total cost of manufacturing : $40
Manufacturer to Retailer : (20/(1-0.2)) x 2 bottles = $50
VAT Amount (12%) : 50 x 0.12 = $6 (paid to manufacturer by retailer)
Now 25$ becomes the cost of goods purchased by retailer and $3 is the VAT paid by retailer to manufacturer.
Retail to Consumer : {((25/(1-0.35)) x (1+0.12))} x 2 bottles = $86.15
VAT Amount collected from customer = 86.15-{(86.15/(1+0.12))}= $9.23
VAT already paid to manufacturer = $6
Balance VAT to be paid to government =$3.23 i.e ($38.46 - $25) x 0.12
There by the VAT is applied only for the difference of the value in every movement of goods from manufacturer up till the consumer where in the total burden of VAT is born by the end consumer who bears the total VAT of $6 and $3.23 i.e total of $9.23
Formula for calculating net retail i.e. retail excluding VAT = ( Selling Price / (1+Vat%))
= (43.08 /(1+0.12))
= $38.46
Formula for calculating Selling retail from Cost = (Unit Cost / (1-Margin)) x (1+vat%)
= 25 / (1-0.35)} x (1+0.12)
= $43.08
In both cases the tax paid to the government is the same but in case of VAT the partial tax is already collected and paid to government even before the goods are sold. In the case of Sales Tax, the tax is paid only upon the sale of goods there by increasing the wait time for tax collection.
Also the unit retail paid by customer also remains pretty much the same in both the cases.
There are currently 2 types of taxes applied on goods majorly across the globe.
1. Taxes on Sale of Goods to end customer
2. Values Added Tax (VAT) or Good and Services Tax (GST)
1. Taxes on Sales of Goods to End Customer or Sales Tax:
This is the tax applied on the final retail price of the goods i.e when the final finished good is sold to the customer or the consumer. In this case the goods at source, manufacturer, wholesaler, distributor are not taxed. Such taxes are collected as a percentage on the final value of goods sold and there could be multiple taxes applied such as state, central, luxury, sin taxes, etc. This leads to inflation of price at point of sale.
But this process also simplifies tax collection as there is only one point where tax is collected in the entire supply chain but to control tax evasions the retail industry should be an organised sector like in case of developed countries like USA, UK, etc. Such taxes are difficult to be applied in a country where unorganized retail in more prevalent like in case of India, Bangladesh, etc.,
Let us see a simple example of sales tax applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $25 each. The retailer buys them from manufacturer directly. He then sells them for $38.5 each after applying 35% margin. If there is a discount then the taxes are applied on the discounted values of the goods sold.
Manufacturer to Retailer : 25 x 2 = $50
Sale of Goods : 38.5 x 2 = $76.9
State Tax 5% : 76.9 x 0.05 = $3.85
Central Tax 3% : 76.9 x 0.03 = $2.31
Sin Tax 4% : 76.9 x 0.04 = $3.08
TOTAL VALUE PAID BY CUSTOMER : $86.13
TOTAL TAX COLLECTED : $9.23
This tax amount collected is paid to the government as part of tax returns quarterly or more frequently based on respective country's finance policy.
2. VAT or GST:
This is the tax that the seller collects on the incremental value of good from the buyer. The major difference between sales tax and VAT is that Sales tax is applied only on the final price of the product that the consumer pays to the retailer and VAT is a stage wise application of tax on the value add all the way from manufacturer up till the consumer. In both the cases consumer is the one that bears the burden.
VAT and GST's definition is similar and the difference can only be made based on the application defined by the government. Some institutions apply VAT on tangible products and apply service tax on intangible services rendered to customers. GST is usually a blanket tax applied across tangible and intangible goods and services on the value added amount. In case of VAT or GST it is always included in the selling price unlike sales tax which are applied on the selling price.
Let us see a simple example of how VAT can be applied in a state of USA.
A manufacturer buys raw material from farmer and makes 2 bottles of whiskey for total cost of $40. He applies 20% margin (25% Markup) and sells them for $28 each. VAT applied is 12% i.e. $3. The retailer buys them from manufacturer directly, he buys them for $25 + $3 VAT. He then sells them for $43 each after applying 35% margin and 12% VAT on net retail. If there is a discount then the VAT/GST is applied on the discounted values of the goods sold minus the landed cost.
Total cost of manufacturing : $40
Manufacturer to Retailer : (20/(1-0.2)) x 2 bottles = $50
VAT Amount (12%) : 50 x 0.12 = $6 (paid to manufacturer by retailer)
Now 25$ becomes the cost of goods purchased by retailer and $3 is the VAT paid by retailer to manufacturer.
Retail to Consumer : {((25/(1-0.35)) x (1+0.12))} x 2 bottles = $86.15
VAT Amount collected from customer = 86.15-{(86.15/(1+0.12))}= $9.23
VAT already paid to manufacturer = $6
Balance VAT to be paid to government =$3.23 i.e ($38.46 - $25) x 0.12
There by the VAT is applied only for the difference of the value in every movement of goods from manufacturer up till the consumer where in the total burden of VAT is born by the end consumer who bears the total VAT of $6 and $3.23 i.e total of $9.23
Formula for calculating net retail i.e. retail excluding VAT = ( Selling Price / (1+Vat%))
= (43.08 /(1+0.12))
= $38.46
Formula for calculating Selling retail from Cost = (Unit Cost / (1-Margin)) x (1+vat%)
= 25 / (1-0.35)} x (1+0.12)
= $43.08
In both cases the tax paid to the government is the same but in case of VAT the partial tax is already collected and paid to government even before the goods are sold. In the case of Sales Tax, the tax is paid only upon the sale of goods there by increasing the wait time for tax collection.
Also the unit retail paid by customer also remains pretty much the same in both the cases.
