Who really pays VAT?
by AccountingWeb on
VAT is presented by government as a consumer tax. After all, everyone else in the supply chain recovers the VAT they pay, don’t they?
Unlike sales tax, everyone in the supply chain pays VAT to its vendors and collects VAT from its customers. And yes, it is true that most businesses recover most of the VAT they pay over to their vendors. Those that don’t are “outside” the scope of VAT e.g. health, insurance, and financial services.
The consumer being the last person in the chain cannot recover the VAT from anyone and so they suffer the real cost of the VAT. But do they.....?
Imagine this situation. You are standing outside two stores; one is registered for VAT and the other not. Both are selling identical products (or services). You see something in one store at a price of $10, in the other store the price is $10 plus VAT. Which store will you buy from?
I assume the answer would be the store that is not charging VAT. So the VAT registered store will have to lower its price to $10 including VAT and pay the VAT due from its revenue.
So who has suffered the VAT? The consumer has paid the VAT in the price but it is the retailer that has suffered the VAT in paying it over to the government.
I believe that VAT is not a consumer tax, it is a tax on business, and don’t believe anyone that tells you otherwise.