Why VAT Is Necessary?

Why VAT?

The value-added tax, or VAT for short, is an indirect consumption tax. It might sound simple, but things can be a bit more complicated. There are different reasons why such a tax system exists around the world. This article aims to explain what are they and why VAT is necessary for a healthy economy?

Why is VAT so important and what are the economic benefits?

It is a great source of government income. Many countries depend on VAT because it helps them fill in their treasuries. In some cases, it can generate as much as 40 percent of the government’s budget. All the money is essential for project spending, health care, building and maintaining infrastructure, and much more.

An important thing to point out is that the revenue from VAT is constant. The continuous stream of revenue will ensure that there will always be some government spending.

It can be a bit complicated at times, but it is a lot easier to manage and calculate VAT than any other methods of indirect taxation. One specific benefit is that companies that have a registration do not carry the burden of the tax. Since VAT broadens the tax base, the government can tax more industries. They even include services.

Of course, some people believe that VAT brings many negative effects. As an example, companies that have a VAT registration might be free from paying some other taxes, but their products’ prices will be much higher than usual. There will surely have negative marketing effects, because some clients will probably choose to buy products elsewhere.

Many people fear that such method of taxation is regressive and can seriously affect the poorer members of society. Also, VAT implementation can be costly. Businesses will have to do careful calculations. Companies will have to take into consideration every stage of production, and that will make things even more complicated. There will always be a risk of additional errors.

Which countries use VAT?

There are quite a lot of them. The exact number is 166. Generally speaking, every EU member state uses VAT. However, such tax laws do not apply to many overseas territories. Other countries which have VAT are Russia, China, India, Australia, New Zealand, Brazil, Turkey, Mexico, to name a few.

The USA does not use VAT as a method of taxation. Instead of that, there is a different system used.

The VAT percent varies greatly in the different parts of the world. Across the EU, the VAT is usually around 20. In the Middle East, it is often very low with Kuwait having 0 and Saudi Arabia 5. Most of the countries across Africa do not even have VAT, but are going to implement it in the near future.

Since its introduction in the 50’s, VAT has transformed the way the financial markets work. There are constant debates over if it is good or bad. But one thing is for sure: VAT is very important tax, that plays a huge role in the economies of many countries.