Q:
What are the main differences between VAT and GST ?
A:
I’m not sure that I can give you a detailed reply to your question as I am not an expert on GST and can only comment on what I understand to be the main differences. Also we have to be a bit careful about terminology. We use VAT to refer to our EC system, but some countries call similar systems GST. For the purposes of this reply, “VAT” refers to our EC system or similar systems in non-EC countries, while GST is a sales tax levied only at the final point of sale.
The VAT system that we have in the UK is the EC VAT system. The principle behind the system is that final consumers (ie private individuals or businesses which cannot recover VAT) have to pay VAT on the full value of the taxable goods and services that we buy. So it sounds like a sales tax.
However, it works on the basis that each supplier charges VAT on his sales, but can offset against that “sales” VAT (or “output tax”) the VAT that he has paid on his purchases and expenses (or “input tax”). So each supplier only pays the difference between his output tax and input tax to the tax authority in his country.
This means that each business in the “chain of supplies” pays only a proportion of the VAT on the final selling price which is borne by us as final consumers.
The system is efficient because it is easy for the tax authorities to collect and administer as the businesses do most of the work. It is also less susceptible to fraud or loss as each business accounts for a proportion of the VAT on the final selling price.
The benefit of the sytem is that if one of the suppliers in the chain underdeclares his liability or is unable to pay, only that proportion of the VAT on the final selling price is at risk, rather than the whole amount.
Many non-EC countries have a VAT system which is similar to the EC system, based on collecting tax along the chain of supply. For example I understand that Canada, New Zealand, Australia operate a very similar system. Just to confuse the issue, I think that in at least one of those countries calls the system GST, but it is a VAT system.
GST is also used to refer to a simpler sales tax system. This is different to VAT as it is only collected by retailers selling to final consumers.
The best examples I can think of are the state and local taxes levied by retailers in the US. If you buy something from a retailer in the US, you normally find that state, federal or local (eg county level) taxes are added onto the sales price at the point of sale. So you might buy something with a sales price of $100 but have to pay an additional 8% state tax and 2.4% of local tax in addition. The retailer has to pay the full amount of these taxes to the appropriate tax authorities, at state, federal or local level.
Clearly GST is a simpler system to the EC VAT system in that generally only the final retailer who has to collect the tax and submit returns and payments to the tax authorities. In the days before VAT, the UK had a tax called “purchase tax” which was levied and collected along the same lines. But VAT systems are being introduced in many countries because the tax authorities recognise the benefits of using the sytem.
I appreciate this is a very simple answer to a very broad query but I hope it helps a bit. If you need more detailed information about GST or VAT systems in non-EC countries, you might try looking on the websites of the international accountany firms.
Kind regards
Marie