Differences and Similarities Between Value Added Tax and Sales Tax

A common question asked within the tax community is this: is sales tax different from value added tax or VAT? In order to answer this particular question, let us outline their differences and similarities.

An Overview of VAT and Sales Tax

Sales tax is a type of tax that a retailer collects when a final sale in a supply chain has been reached via that sale to an end consumer. An end consumer pays the sales tax for every purchase. A business issues a resale certificate to a seller when purchasing business supplies or inputs that are to be resold as sale tax isn’t due. The country’s tax authority doesn’t receive tax revenue until there’s a sale that’s made to a final consumer.

As for value added tax or VAT, its collection is by every single seller in every stage of a supply chain. Producers, suppliers, retail shops and distributors all collect VAT for every sale that is taxable. Production, retail stores, distribution, suppliers, and final consumers are all paying VAT on taxable purchases. A business has to track and document value added tax that it has paid on purchases for it to receive credit for VAT paid in a tax return. A tax authority will receive tax revenue throughout a supply chain instead of at the sale of a product or service to a final consumer.

What will Trigger the Administration of the Taxation?

For sales tax, the tax payer with a physical residence within a tax authority’s jurisdiction. It can also be those that meet economic nexus thresholds. All tax payers are to be very diligent in finding out if they already meet or exceed the thresholds.

For value added tax, a business with a permanent establishment, ability to enter agreements, and bookkeeping facilities are to register provided that the meet or exceed the mandatory VAT registration threshold in the tax jurisdiction. There are certain activities as well that trigger VAT registration obligation.

Who Will Remit and Collect the Taxes?

For both value added tax and sales tax, the seller is made responsible in the collection of the taxation as well as the remittance to the country’s tax authority. However, there are rare cases wherein the buyers are to recognize the taxes instead. In the United Arab Emirates, only value added tax is applicable and VAT-registered persons have the responsibility in implementing VAT.

How is Invoicing Done for Both Types of Taxation?

For sales tax, sellers are to state the sales tax separately. For value added tax, sellers are to state VAT separately as well as the registration number for the VAT invoice.

Who Should Pay the Tax?

For sales tax, it is the final consumer that pays the tax. For VAT, purchases made are taxed which means all those that are part of the supply chain are to pay VAT. With VAT specifically, the burden economic-wise is on a final consumer as he or she does not have rights in deducting VAT or reclaiming it.

Value Added Tax vs. Sales tax: Taxability of Purchases Made by Businesses

For sales tax, the reseller will be issuing an exemption certificate and will give it to the vendor. The reseller won’t pay tax for the purchase of items which are to be resold.

For value added tax, a reseller will pay tax to a vendor, then reclaim VAT for tax amount paid that is for business supplies or inputs.

Value Added Tax vs. Sales tax: Audit Done by the Authorities

For sales tax, a vendor that is selling to a business that will be reselling is to keep the exemption certificate provided by the reseller and make records. Otherwise, it will risk audit assessment that will turn an exempt sale into a taxable sale.

For value added tax, all parties in a supply chain is to keep the invoices given for purchases to document VAT that is paid so it can be reclaimed. A review of transactions wherein exempt or zero rate VAT was paid is to be made by a VAT-registered person.

Value Added Tax vs. Sales Tax: When Authority Gets Tax Revenue

For sales tax, the taxation authority does not receive any tax revenue until a sale is made to an end consumer.

For value added tax, a tax authority will receive a tax receipt earlier and will get it along the distribution chain wherein value is added.

What Should all those that Purchase Do When Businesses Don’t Have Liabilities in Collecting Taxation?

For sales tax, there is a need to calculate then remit the tax to the tax authority.

For value added tax, generally, purchasers are to calculate then report every single reverse charge if or when necessary.

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Taxation can be complex, especially if you try to keep up with the changes made to tax regulations. If you want to ensure compliance, then call us today as we can help you with all your tax-related needs, requirements, and obligations.