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A value-added tax (VAT or goods and services tax (GST), general consumption tax (GCT)) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared with, a sales tax.
VAT is generally charged at the border, at the same time as customs duty and uses the price determined by customs. [24] However, as a result of EU administrative VAT relief, an exception called Low Value Consignment Relief is allowed on low-value shipments. VAT paid on importation is treated as input VAT in the same way as domestic purchases.
However, according to the definition, VAT is neither progressive nor regressive, since the rate neither increases or decreases with the taxable amount. [58] [59] [60] The zero rating of food, and the permission for businesses to reclaim input VAT, have been said to mean that the government in effect subsidises the food industry. [4]
A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government.
In economics, zero-rated supply refers to items subject to a 0% VAT tax on their input supplies. The term is applied to items that would normally be taxed under valued-added systems such as Europe's Value Added Tax (VAT) or Canada's Goods and Services Tax (GST). Examples of these items include most exports, basic groceries, and prescription drugs.
For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process. VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax).
The usual operation of VAT is as follows: a business that buys and sells goods charges VAT to those to whom it sells ('output tax'), and is charged VAT by those from whom it purchases ('input tax'). It can reclaim (subject to various rules) the VAT it pays, and so passes to the government the net VAT it collects (being output tax less input tax).
Most VAT systems allow the amount of such VAT paid or considered paid to be used to offset VAT payments due, generally referred to as an input credit. Some systems allow the excess of input credits over VAT obligations to be refunded after a period of time.