Finance Guide

A Value Added Tax is a form of sales tax. Its key distinguishing feature is that it is charged even on business to business transactions. However, businesses are usually entitled to refunds on value added tax which they have paid on products which could be regarded as inputs to their own business process. Typically, businesses keep careful records of all their transactions and apply for refunds to the government, if they are owed one, on a periodic basis, usually quarterly. If the company sells a large volume of products to consumers rather than businesses, it is possible that the company, on a net basis, will owe the government money rather than the other way around.

Value Added Tax is a major component of taxation in most European countries. In France, where the tax was first invented, it is, in fact, the principal means of raising revenue for the government.

Rates differ between countries but typically value added tax is charged at between 10-25% of the value of a sale. Governments often levy value added tax at a reduced rate on some goods and, in a few cases, goods may be exempt from it entirely.

Sometimes businesses quote product prices in which value added tax has already been factored in; sometimes the VAT amount is shown only when the sale is processed.

Taxes represent a transfer of wealth from the citizens of a country to the ruling power of that country. As such, they have existed since ancient times. The Bible speaks of them and it is clear from the biblical text that tax collectors were generally reviled. Almost anything can be taxed and there are various ways in which taxes can be applied.

The first taxes of which we have a documentary record were applied in ancient Egypt. In ancient times, it is clear that taxpayers were expected to offer up a portion of the agricultural produce they raised from the land to the ruling power of the day.

As economies have evolved, governments and rulers have chosen to raise taxes in different ways. For a long time, many countries raised revenue primarily through taxing imports into the country. In modern times, the income tax, which is charged as a percentage of all income earned in a period of time has become the most popular method by which governments in developed countries raise revenue. Corporation tax, a tax charged as a percentage of the profits made by incorporated companies, is also significant. Many countries also have sales taxes, or value added taxes, which are charged as a percentage of the selling price of a product or service.

Most countries have classes of organization or individual which they deem to be exempt from normal taxation. These vary from country to country. It is often the case that charitable organizations are exempted from tax. The definition of what constitutes a legitimate charity is open to debate and usually there will some government agency set up to make judgements about this and to monitor the conduct of the charitable organizations.

In addition, it is very common that religious institutions are exempted from tax. Naturally, this gives rise to the question of what constitutes an actual religion which, in some cases, is not always clear. The tax exemption given to organizations such as charities or religious institutions may carry with it certain obligations too. For example, tax exemption may be a requirement that the organizations refrain from political campaigning.

It is also common for educational institutions such as schools and universities to be exempted from tax. In some countries, some or all of the employees of the government or of other governments may be exempted from tax.

In the case of sales or value added taxes, many countries declare certain types of good to be exempt from the tax. For example, it is common for books to be declared free of such taxes.