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Mr. Gregory White
Mr. Gregory White, Teacher
Category: General
Satisfied Customers: 5240
Experience:  M.A., M.S. Education / Educational Administration
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what is valued added tax and how does it work.

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what is valued added tax and how does it work.

A value added tax, also called a VAT is a consumption tax. As the buyer, it is the tax that is put on the purchase price of the item. As the seller, it is the tax on the "value added" to the product, material, or service, from their own accounting view, by the specific stage located in the manufacture or distribution of the product. The manufacturer had to give the government the difference between the two amount and is able to keep the rest for themselves to help offset the amount of taxes that they had previously paid on the inputs for their production.

Example - on an item with a 10% VAT:

  • The manufacturer pays $1.10 ($1 + ($1 x 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10.
  • The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 x 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 - $0.02 - $1.10 = $0.20)
  • The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 - $0.03 - $1.32 = $0.30).
  • The manufacturer and retailer realize less gross margin from a percentage perspective.

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