Tuesday, September 4, 2012

What is the similarities and differences between Sales Tax and VAT?

Both Sales tax and VAT are Consumption tax. To take an example, if a consumer consumes a goods worth Rs. 100 on which tax rate is 10%, the objective of both the system is to collect Rs 10 (i.e. 10% of Rs 100) to the Government. Both are Indirect Tax, meaning the consumer does not pay the tax to directly the government, but to the business from whom he has purchased the goods. The business remits it to the Government.

In Sales tax, the entire tax collected from the consumer by the dealer is paid by one of the dealer (out of the chain through whom the goods have passed). Chain meaning Chain of business comprising of Manufacturer -Wholeseller – Intermediate – Retailer etc. To take the above example, the said tax of Rs. 10 would be collected from one of the person in the chain, it can be the manufacturer or Wholeseller or the Retailer (depending on the type of Sales tax system in the State). In VAT system, the same Rs 10 would be collected in installments from every dealer in the chain. Each dealer will contribute a portion of the tax in proportion to his margin of operation.

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