This blog is written by Mr. Waqas Haider Gondal. Please read this blog and provide your valued comments
Default surcharge is a civil penalty to encourage businesses to submit their VAT Returns and pay the tax due on time.
Value-Added Tax (VAT)
A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
More than 160 countries around the world use value-added taxation, and it is most commonly found in the European Union. But it is not without controversy. Advocates say it raises government revenues without punishing success or wealth, as income taxes do, and it is simpler and more standardized than a traditional sales tax, with fewer compliance issues. Critics charge that a VAT is essentially a regressive tax that places an increased economic strain on lower-income taxpayers, and also adds bureaucratic burdens for businesses.
Value-added taxation is based on a taxpayer’s consumption rather than their income. In contrast to a progressive income tax, which levies greater taxes on higher-level earners, VAT applies equally to every purchase.
VAT’s International Track Record:
The vast majority of industrialized countries that make up the Organization for Economic Cooperation and Development (OECD) have a VAT system. The United States remains the only notable exception.
Most industrial countries with a VAT adopted their systems in the 1980s. Results have been mixed, but there is certainly no tendency among VAT countries to have small budget deficits or low government debt. According to one International Monetary Fund study, any state that switches to VAT initially feels the negative impact of reduced tax revenues despite its greater revenue potential down the road.
VAT has earned a negative connotation in some parts of the world where it has been introduced, even hurting its proponents politically. In the Philippines, for example, Senator Rafael Recto, the chief proponent of VAT in the 1990s, was voted out of office by the electorate when he ran for re-election. But in the years that followed its implementation, the population eventually accepted the tax. Recto ended up finding his way back to the Senate, where he became the proponent of an expanded VAT.
Industrial nations that have adopted a VAT system have had mixed results, with one study noting that any country making the switch feels an initial negative impact from reduced tax revenues.
Pros and Cons of a Value-Added Tax:
In addition to the fiscal arguments, proponents of a VAT in the U.S. suggest that replacing the current income tax system with a federal VAT would have other positive effects.
Pro: Closing Tax Loopholes:
Not only would a VAT greatly simplify the complex federal tax code and increase the efficiency of the Internal Revenue Service (IRS), proponents argue, but more important, it would make it much more difficult to avoid paying taxes. A VAT would collect revenue on all goods sold in America, including online purchases. Despite efforts to close tax loopholes that allow internet companies to avoid charging customers’ taxes in states where they do not have a brick-and-mortar business, unpaid taxes on online sales cost states billions in potential income that could fund schools, law enforcement and other services.
Pro: A Stronger Incentive to Earn:
If a VAT supplants American income tax, it eliminates the disincentive-to-succeed complaint levied against such progressive tax systems: Citizens get to keep more of the money they make and are only affected by taxes when purchasing goods. This change not only confers a stronger incentive to earn, it also encourages saving and discourages frivolous spending (theoretically).
Con: Higher Costs for Business:
Opponents, however, note many potential drawbacks of a VAT, including increased costs for business owners throughout the chain of production. Because VAT is calculated at every step of the sales process, bookkeeping alone results in a bigger burden for a company, which then passes on the additional cost to the consumer. It becomes more complex when transactions are not merely local, but international. Different countries may have different interpretations on how the tax is calculated. This not only adds another layer to the bureaucracy, it can also result in unnecessary transaction delays.
Con: Encouraging Tax Evasion:
In addition, while a VAT system may be simpler to maintain, it is costlier to implement. And tax evasion can still continue, even be widespread, if the general public does not give it its wholehearted support. Smaller businesses in particular can evade paying VAT by asking their customers if they require a receipt, adding that the price of the product or service being purchased is lower if no official receipt is issued.
Con: Conflicts with State and Local Governments:
A federal VAT could also create conflicts with state and local governments across the country, which currently set their own sales taxes at varying rates.
Con: Higher Prices-Especially for Low-Income Consumers:
Critics also note that consumers typically wind up paying higher prices with a VAT. While the VAT theoretically spreads the tax burden on the added value of a good as it moves through the supply chain, from raw material to final product, in practice the increased costs are typically passed along to the consumer.
Even so, better-off consumers could ultimately benefit if a VAT replaced the income tax: As with other flat taxes, a VAT’s impact would be felt less by the wealthy and shouldered more heavily by the poor, who spend a larger percentage of their take-home pay on necessities. In short, lower-income consumers would pay a much higher proportion of their earnings in taxes with a VAT system, critics charge. That could be mitigated to some extent if the government excluded certain necessary household goods or foodstuffs from the VAT, or provided rebates or credits to low-income citizens to offset the tax’s effects.
- A value-added tax, or VAT, is added to a product at every point on the supply chain where value is added.
- Advocates of VATs claim that they raise government revenues without punishing success or wealth, while critics say that VATs place an increased economic strain on lower-income taxpayers and bureaucratic burdens on businesses.
- Although many industrialized countries have value-added taxation, the U.S. is not one of them.
A consumption tax is a tax on the purchase of a good or service. Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services.
Consumption tax can also refer to a taxing system as a whole in which people are taxed based on how much they consume rather than how much they add to the economy (income tax).
Breaking Down Consumption Tax:
- Examples of consumption taxes include retail sales taxes, excise taxes, value added taxes, use taxes, taxes on gross business receipts and import duties. These taxes are borne by consumers who pay a higher retail price for the good or service. The higher price includes the consumption tax which is collected by the vendor and remitted to the appropriate federal, state, or local government. Consumption taxes are often levied at different rates on different commodities according to perceptions of whether a commodity is considered a necessity (such as food) or a luxury (such as jewelry).
- The consumption tax is not a new idea. It was used by the U.S. government for much of our history before being replaced with an income tax. The Bush administration backed a version of this in 2003, although the proposal was defeated. The proposal called for the United States to shift from a mainly progressive income tax system to a national tax system that utilizes consumption taxes exclusively. Ideally, a properly designed consumption tax system would reward savers and penalize spenders. While the U.S. does not have a national consumption tax, many countries in the world have imposed some form of national consumption tax.
Consumption Tax vs. Income Tax:
A consumption tax is charged to people when they spend money. An income tax is levied on people when they earn money or when they receive interest, dividends, or capital gains from their investments. Proponents of a consumption tax argue that it encourages saving and investment and makes the economy more efficient, while income taxation penalizes savers and rewards spenders. Thus, they argue that it is only fair that people are taxed on what they take out of the limited resource pool through consumption, rather than what they contribute to the pool using their income.
On the other hand, opponents maintain that a consumption tax adversely affects the poor who, by necessity, spend more of their income. They state that since consumption tax is a form of regressive tax the wealthy population consume a smaller fraction of their income than do poorer households.
An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, tobacco, gasoline, or tourism. Some excise taxes are charged to discourage a behavior or purchase of certain goods that are thought to be detrimental to the economy. These excise taxes are more commonly known as sin taxes. Other excise taxes are applied to people who benefit from a program or infrastructure. For example, taxes on gasoline are collected from drivers to maintain roads, highways, and bridges.
Import duties are taxes levied on an importer for goods entering the country. The taxes are passed on by the importer to final consumers through higher costs. The amount of this consumption tax payable varies greatly depending on the imported good, the country of origin, and several other factors. Import duties can be calculated as a percentage of the value of the goods being imported, or based on the quantity, weight, or volume of the goods being imported.
Retail Sales Tax:
The sales tax is usually ad valorem, that is, it is calculated by applying a percentage rate to the taxable price of a sale. Although sales tax is a form of state tax, not federal tax. In addition, the state sales taxes exempt all sorts of spending, such as food, health, and housing.
WAQAS HAIDER GONDAL
NOVEMBER 9, 2020
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