Personal Finance

Taxes on purchases

Taxes on Purchases, or Purchase Taxes, are the taxes one has to pay to the government for consumer goods. Generally purchase tax is computed on the wholesale price and is paid by the wholesaler dealer, who passes the amount he paid on to the retailer; the retailer in turn recovers the amount he paid from the customers. Taxes on purchases are replaced by Value Added Tax in most of the countries.

Value Added Tax is the sales tax which is imposed on businesses on the sale of products and services. VAT can be considered as an indirect tax or a hidden sales tax as it is usually collected from some other people than the individual who really has to bear the tax amount.

Value Added Tax (VAT) was originally introduced in France in 1954. Over the years, VAT has been a vital part of the tax structure of most of the Western European countries. The United States government has considered instituting a value added tax to fund national health care programs in the early 1990s.

All business can recover the VAT amount on the products and services which they purchase to provide any further services or supplies provided to end-customers (this can be directly or indirectly). But it should be noted that the personal end-users of products and services are not able to collect value added taxes on purchases. By performing this operation in a constant manner, the entire tax amount imposed on a product at each and every stage in the economic supply chain will be a steady fraction of the value added by a company to its products. Hence in this method of tax collection the majority part of the tax is collected by business. The main reason behind implementing VAT is that very high sales taxes and tariffs encourage smuggling and cheating.

Traditionally, the value added tax was used in times when an excise tax or a sales tax was found unable to collect directly. The logic behind VAT is that the whole economy is needed in the enforcement of tax. That is, when value added tax in collected at each production level, the previous production level is impelled to collect the next level tax so that it can adjust the amount of tax paid previously by that production level. In short, fake invoices and any such documents will always try to cheat the system. VAT helps to make a steady economy by collecting correct tax rates for all products and services.

In short, implementation of value added tax has resulted in discouraging tax evasion and tax fraud.