Who Pays VAT

Value Added Tax or VAT is concocted as a tax scheme to avoid cheating and smuggling on the part of the businessman who hates sales tax.

But who really pays for this kind of Tax? Read and analyze who really is.

Value Added Tax or commonly known as VAT is defined as similar to sales tax. Since its creation as a means to replace sales tax and tariffs which, as economists says, encourages cheating and smuggling, its application as a tax measure have been the major tax revenue of most countries, say for example France and United States. What is really the scheme that underlies this kind of tax? It can be classified as an indirect tax wherein business or manufacturers pass on the amount of this tax on their product and services as it goes down the supply chain or directly to the consumer.

The Question now is Who Pays VAT?

There are various critics to this kind of tax system and the one who cries loud says it basically put higher taxes on middle and low-income level consumers. But before we make a conclusion lets dissect who are the players in this tax scheme.

Businesses that Pays VAT

The original or main purpose of VAT is said to be to avoid cheating and smuggling as provoked by sales tax and tariffs set on businesses. What happens then in this scheme is that businesses of all sector pay Value Added Tax on their product and services. If the businesses are up in the supply chain, the expenses spent on VAT are then passed on to other lower class of the supply chain down to the consumer.

If we are going to study this natural flow of VAT as it goes down the supply chain, we can then conclude that businesses, big or small, can regain what they have paid for their VAT because either this tax has been passed on through the price of their products and services to small businesses and consumers.

Consumer that Pays VAT

If businesses have the opportunity to pass their expenses on VAT to other businesses in their supply chain and/or directly to the consumer, what is left then for the consumer in dealing with this kind of tax. Consumer when he buys or get a service from a business provider then has no way to pass the VAT he incurred when purchasing and paying for these products and services because he is at the end of the line of the supply chain.

If this is the scenario of the whole scheme of VAT then we can easily conclude that the consumer is the one who pays VAT.

1 Comment

  • SHRIKANT DALVI said on January 17, 2011
    I have signed an agreement with a builder on 01.07.2010 at Pune, agreement value of which is Rs 20,49,750. He is asking for payment of VAT TAX & SER.Tax...Please advise...whether it is appropriate to pay the said tax, if so, at what % age...etc. a line in reply is requested please., Thanks, Shrikant dalvi


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