IVA is an acronym for Value Added Tax. In some countries it is the tax on goods and services (GST). VAT is a consumption tax assessed on the surplus value of goods and services. It is a method used by more than 166 of the world’s nations to increase government revenue. The United States is an exception in that it uses a system of sales taxes rather than VAT.
There are two basic methods of calculating VAT, namely the credit bill or the invoice-based method and the account-based method. According to the invoice-based method, the application of the tax is on sales transactions. Customers receive information on the amount of VAT paid while companies receive credit outlining the VAT paid on input materials and services. With the exception of Japan, most countries use the invoice-based VAT calculation method. In contrast, an account-based VAT is calculated at the end of a reference period. The process begins with the total taxable sale calculated, then subtracted from the total taxable purchases. The VAT rate is then applied to the difference. This method is widely used in Japan.
A brief history of VAT
The countries that first applied VAT were France and Germany. The tax was in the form of a general consumption tax during the First World War. However, France supported the modern use of VAT in the 1950s on the initiative of Maurice Laure, joint director of the French Revenue Agency in 1954. The concept of VAT was born in 1918 through the proposal of the German industrialist Dr. Wilhelm von Siemens. Initially, the tax concerned only large companies. Later, the government expanded it to include all sectors of activity. Today, VAT is equivalent to 50% of the revenue of the French government.
Comparison of VAT with sales tax
The first difference is that VAT is applied to exports while sales tax is not. Second, the basis for payment of sales tax is on the full amount of imports. However, VAT payment applies only to the value added to the goods both by the importer and the retailer. Thirdly, it is the final consumer who pays sales tax, while all buyers pay VAT. Fourthly, based on sales taxes, retailers guarantee vendor exemption certificates and therefore do not tax resold items. However, retailers pay taxes to the seller based on VAT. Furthermore, they are free to claim VAT for taxes paid on factors of production. Finally, VAT tax receipts are received by the tax authorities before the sale of the goods. In contrast, tax authorities have access to tax revenues only after the goods have been sold to the final consumer in the case of sales taxes.
Benefits and limits of VAT
There are three main advantages to using VAT to collect revenue. First, compared to other taxes it minimizes tax evasion. Secondly, it is simple to administer. Thirdly, since VAT is based on the added value of the goods, it does not affect the price of the goods. On the other hand, the limitations of VAT include the fact that it is relatively complex to understand. Furthermore, it is quite expensive to implement.