Vat and sales tax are consumption taxes, holding different implications for producers and consumers. Vat, or Value added tax is an indirect form of tax, which is applied to the whole production cycle i.e. the value added at each stage on the goods and services produced. Sales tax is the common form of taxes which has a set percentage and is applied to the final product when a consumer buys it. The real price of a good and service may be lower than the stated price, with tax adjusted to account for the higher amount. This is why sales tax is considered a direct form of taxation.
In both cases, the burden of taxes falls on the final consumer. However, in VAT, the burden is greater when compared to sales tax. This is because taxation takes place at every stage of the production process before it is sold to the customer. In order to accommodate the tax affect, producers charge their clients greater amounts. Sale tax, on the other hand, is cascading, where the tax becomes effective every time an exchange takes place.
While sales tax is easy to calculate, Vat provides greater transparency and efficient handling of the overall tax amount. With Vat, all producers are bound to pay the same tax regardless of their position in the production chain. Although extra accounting effort is required, it gives customers and the tax collecting agencies greater clarity regarding their tax status.
The VAT system allows economic stability, and limits tax evasion, which is greatly prevalent in sales tax. The general consensus is that when tax percentages are higher, consumers tend to indulge in unlawful practices such as buying at wholesale or through the internet etc. In Vat, the collection mechanism reduces the tax evading activity to a bearable level, although chances of fraud exist – missing trading fraud or carousel fraud for instance.