Hi, I really tried to understand the concepts of the above-mentioned terms but I find it hard to absorb and imagine how they work.
Can someone simplify vat, input tax and output tax? Thank you so much!
In: 5
Value-added tax is formally levied on each producer in the chain. Each producer in that chain pays VAT and the end consumer who buys the finished product doesn’t formally. Economically, however, the consumer pays for the cost of the VAT because producers
will try to pass any tax onto whoever buys their producer by the amount they can get away with.
You can contrast a VAT system to a system that primarily uses sales tax, in which most of the taxes on the product is levied on the final consumer and not on the businesses that contribute to the production of the good.
If you are a producer, value added is the price you sell the product for to the next producer (output) – the price you brought the product for from the previous producer (input). If that difference is positive and most of the time it will be because businesses add value to a product, a value-added tax will be levied on that value
added.
The input tax is the total VAT on the input when a producer buys and the output tax is the total VAT on the output when a producer sells. Each producer pays that difference for them to the government collector.
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