Understanding VAT

Value Added Tax (VAT) is a form of consumption tax that is levied on various goods and services provided to consumers. Revenue gained by businesses for the provision of goods and services are taxable. Therefore, the taxable portion of business sales will be used to pay the Government in the form of VAT and other taxes for raw material and other inputs. VAT is paid by the end consumers of the goods. In most countries, VAT is one of the main sources of income for the Government as it entails a vast amount of items and services. Due to its importance, most Governments will impose VAT, or other form of taxes which are similar to VAT, on the end users.
What is VAT and when is it charged? VAT is charged on a majority of business transactions across the value chain of a product or service. To help us to further explain VAT, let us use the example of a fashion company. In the first level of the value chain, the supplier of raw materials like cloth and thread will charge the clothes manufacturer for the goods and also a certain amount of VAT. After the manufacturer finishes sewing and preparing the clothes, the manufacturer will sell it to the retailers at a certain mark-up price, which also includes another stage of VAT. Finally, the retailers will sell the clothes to final customers in shopping centers and boutiques. Once again, the price that the retailers charge customers includes VAT. Therefore, we can see that the amount of VAT increases as it passes down from the supplier to the end customer. The end customer will bear the total VAT costs, and each entity in the value chain will have to remit the tax over to the Government.
Different countries have their own VAT rates and their own list of goods and services which are charged for VAT. In the United Kingdom and some of the countries in the European Union, the standard VAT rate is 20 percent. Most items and services will be charged with this standard rate. There is also a reduced VAT rate of 5 percent and a zero VAT rate of 0 percent for certain classes of goods and services. Certain goods and services which are considered to be beneficial to the community and the country might be charged at a lower VAT rate. For example, domestic fuel and power, energy-saving equipments and sanitary hygiene goods are a few categories of items which qualify for the reduced VAT rate of 5 percent. Books, newspapers, public transportation and certain types of food qualify for the zero VAT rate. There are also certain goods and services which are exempted from VAT. These services include insurance, education, medical treatment and fundraising.
VAT and taxation in general is a difficult topic for most people to understand. To help you get a better grasp of what is VAT and other issues related to VAT, feel free to get in touch with your loc