Value Added Tax in European countries - Research Paper Example

It was evident that if there was ever going to be an efficient single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. This created tax is known as Value Added Tax (VAT). Drawing reference to Economy Watch (2011), it described Value Added Tax (VAT) as being a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service.

Initiated for the first time April 10, 1954 in France by Maurice Laure; the joint director of tax authority, the VAT is designed to eliminate any problems which may be caused by double taxations. The VAT is intended to be charged whenever there is some added value to raw materials. The taxpayers on the other hand, will get credit for the amount of tax paid off at the stages of procurement. For further clarification, the European Commission Taxation and Customs Union declares a taxable person as any individual, partnership, company or whatever which supplies the taxable goods and services in the course of business.

However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the member State, the person does not have to charge VAT on their sales. The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. As such, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage.

The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition - at every single stage - there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple (Economywatch.com) For the purpose of exports between community and non-member countries, no VAT is charged on the transaction and the VAT is already charged on the transaction and the VAT already paid on the inputs of the goods for export is deducted – this is an exemption with the right to deduct the input VAT, also called ‘zero-rating’.

That means there is no residual VAT contained in the export price. However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the community. Taxable people registered for VAT will be able deduct this VAT on their next VAT return. The system has proven to be effective in avoiding problems caused by double taxation of goods and services and also problems with the conventional sales tax.

Compared to the VAT, the Sales tax does not provide for input tax credit, which means that the consumer may pay tax on an input that has already been previously taxed. This scenario should be better able to explain the VAT system in Europe. This scenario will take a rate of 10% 1. The Manufacturer pays $1.10 for raw materials.