VAT is the widely known term in our everyday life. The abbreviated form of the VAT is Value Added Tax, which is basically the consumption tax related. This tax applies to a product at the certain stage of production and while the product is ready for retail sale. This tax comes into consideration for every size of business no matter if it is a startup or established. It is applicable to most goods and services offered and the percentage is determined for every country separately. It is important for making the growth of a country, but in some other way, it also affects businesses.
Collection process
Every company needs to make registration for VAT. Depending on the country rules, the registration criteria have some differences. The entities need to register for a some period of time, mostly for 12 months. After the VAT registration, there will be an additional amount of charge applied to all sales of the company. This additional amount is collected through the payment invoice. Every three months, the company has to pay their VAT to the state fiscal service. Until the VAT is paid, its amount should be deducted from income. The actual purpose of the VAT is a consumer tax and not a business tax.Impact on business
Definitely, VAT is a good thing for a country as it acts as the “collection agent” on behalf of the government. But it has some direct impacts on businesses. VAT is not an expense for a business, it is a cost that passes through the customers at the time they purchase. It impacts indirect costs including pricing, cash flow, financial reporting, tax accounting, supply chain as well as compliance processes. For non-compliant, the cost is greater and also may incur penalties as well.Challenges
The VAT rules stand as a challenge in front of the business organizations. The challenges will be like this:- It eventually needs some extra functions to perform, such as ensuring proper VAT calculation, collection, complying with laws, continuous update for systems, employees training etc.
- Charging of business structure may create problems. For some business structures it can be a hassle as the different business entities need to handle one product or service.
- Registering with VAT will legally need to prepare and keep the ranges of business records as the authorities might ask for annual accounts, general ledgers, purchase daybooks, issued and received invoices and credit and debit notes too. So the organizations have to keep records up to date for at least 5 years.
- VAT also makes uncertainty for the business as well as to the customers,because it eventually increases the costs of products and services.
Though it seems stressful, still, VAT is necessary for the economic growth of the country, which makes the implementation even more straightforward and affordable. It also may help a business to grow efficiently in the long run. If a proper roadmap is followed, then VAT will also be helpful for a business run smooth.