The Difference Between Sales Tax and VAT

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VAT is technically different from a sales tax – even though they are both consumption taxes. 

It would have been easier for states to charge consumption tax if they were charging sales tax and not VAT. This is because VAT is charged at every level of production, while sales tax is charged on only the end user, and at the point of sale. 

Under a VAT system, if you buy cocoa in Delta, you’ll pay input VAT. If you turn that cocoa to chocolate and resell in Lagos, you’ll offset that VAT you paid in Delta before paying the balance to the government. Under a sales tax system, no consumption tax will be paid in Delta, because the buyer is not the final end user. 

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This issue is why countries that practice VAT (e.g. UK) typically collect it centrally. While countries that have a sales tax system (e.g. US), typically collect it by state and charge different rates. In fact, some have said Amazon chose Seattle as its HQ when it started because only retailers with physical presence paid sales tax at the time. 

So, you can see why each state charging VAT and not its own individual sales tax presents a challenge. 

This is a technical and practical argument. Rivers state won its argument on legal grounds which still stands. Plus, it’s important that every state figures out how to be more commercially viable. Even though individual collection of VAT may not be very efficient as a result of some practical issues with implementation, it might just be the nudge required to push some states into action.

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By Babatunde Akin-Moses

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