Do you often confuse sales tax and VAT? Well, you are not alone in this dilemma. The manifold similarities between these two indirect taxes often confuse the taxpayers of today. Understanding their differences will be your key to making a comprehensive tax filing at the end of each fiscal year. Therefore, let us make a thorough exploration of what makes the sales tax different from the VAT or vice versa.
Definition of Sales Tax and VAT
A sales tax is an indirect consumption tax that our government imposes on consumers when they purchase goods and services. This tax is thus solely based on the consumption rate of a consumer. In India, the sales tax is right now popularly known as Goods and Service tax or GST. This tax is levied only one time during the purchase of the product.
VAT or Value-added tax on the other hand is another type of consumption tax that the government levy from its citizens. But the only difference lies in the fact that here the tax is incurred at every stage of the product development. From the start of the manufacturing through each stage of its production, circulation and consumption process the VAT is applied.
What Are The Differences Between Sales Tax and VAT
The difference between these two consumer taxes mainly is how they are imposed on the end user. Let us understand their differences by measuring various sections including their operations, locations, types, and rates. The category-wise differences between sales tax and VAT are;
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The Working Mechanism
Sales tax works on all the retail sales. The local as well as the Union government can impose sales tax on the taxable products. But this tax is imposed only at the time of product purchase. The step-by-step gradual accumulation of tax on the end product is missing here.
But in the case of VAT, the government accesses it at every stage of the production of the product. From buying the raw material to showcasing it on the product shelf, the end product undergoes VAT imposition at several stages. Although there is a deduction of previous taxes at each successive stage of production, the person involved in the supply chain has to pay the tax on their profit.
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The Types of Sales Tax and VAT
You can make a difference between sales tax and VAT depending on their types. There are 5 different types of sales tax. These are retail sales tax, value-added tax, wholesale sales tax, use tax and manufacturers sales tax.
On the other hand, you can classify VAT on the basis of income, consumption and GNP of the product or services. VAT applies to the category of the product or services. The VAT can therefore be standard VAT, Zero VAT and exempted VAT.
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Applicability of Sales Tax and VAT
The sales taxes are applicable on the basis of goods and services that the end user purchases. The formula for the calculation of sales tax is (Total Sales Tax = Cost of item × Sales Tax Rate). India embraced the GST in 2017. The GST slab here is classified as 5%, 12%, 18% and 28%.
The VAT rate in India is 18%. However, the percentage varies for different products and services. The formula to calculate VAT is (Divide gross sale price by 1 + VAT rate).
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The Taxpayers
Sales tax is imposed directly on the end customer. Customers pay this tax only when they purchase the taxable product or service. The businesses collect this tax only to send it to the government during monthly, quarterly or annual tax submissions.
On the other hand, everyone present in the supply chain takes part in paying the VAT. Starting from the manufacturer, and wholesaler to the retailer, the burden of VAT imposes on all. But they can pass the tax burden by claiming input tax credits.
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The Complexity of Tax Filing
Sales tax is way simpler to calculate and file during the annual taxation billings. It is very easy to monitor as it is collected only once at the time of final purchase. However, it can have a cascading effect which means a tax on tax if there are intermediate goods involved there.
The VAT collection and filing is a more complex job. It requires tracking the VAT payment throughout the supply chain and inputting its credits. VAT calculations therefore require more sincerity.
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Tax Mentioned in the Invoice
During the filing of sales tax businesses show it as use tax. Based on this tax they can claim for exemption or some tax returns.
In the case of VAT, the taxpayers report it as reverse charges. They can pass on their tax obligation to the next person in the chain.
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The Impact Of Nexus
Sales tax is explicitly dependent on the nexus. Nexus refers to the physical presence of a taxpayer in a jurisdiction. You can make your nexus at a location through a physical shop, through product sellers and suppliers.
On the other hand, businesses collect VAT through permanent establishments. This can be the existence of a facility or bookkeeping facility.
Conclusion
To sum up, Sales tax and VAT are two vital consumer taxes. Taxpayers need to know the differences between these two taxes to file them with utmost accuracy. Complying with your consumer taxes with clarity will only ensure your safety from legal complexities.
Also, Read – Sales Tax Vs. Use Tax: What Is the Difference and Why Does It Matter?
FAQs
1. Who collects and remits sales tax and VAT?
For both sales tax and VAT, it is the seller who is responsible for collecting tax. They then remit the tax to the tax authority of that country.
2. What are the audit risks for sales tax and VAT?
The sales tax collector must keep valid exemption certificates to use to exempt from taxes or minimize the effects of an audit. In the case of VAT, both the seller and purchaser need to keep the record to reclaim the taxable money.
3. What is the revenue timing for tax authorities?
The tax authorities do not get the tax revenue until the product is purchased by the final consumer. In the case of VAT, they get it throughout the distribution process in the supply chain.
4. What should a purchaser do when the vendor is not liable to collect tax?
In such a case, the purchaser can directly collect and remit the tax to the tax authority. The purchaser can report for a reverse charge if they need it.
