Value added tax (VAT) is a best understood as money spent on consumption of goods and services. That is to say, it is a Consumption Tax. Implementing VAT is a best practice which all business organizations must comply with according to tax laws.
There are two ways of looking at VAT; from the buyers’ perspective and from the sellers’ perspective. The buyer looks at VAT as an added price for purchasing the product while the seller considers it as a “value added” price to his product or service. At the end of the whole buying and selling process the government collects the added value while both the buyer and seller get their benefits. The buyer pays his tax and gets the benefits of using the product. At the same time the seller also ends up making a profit and paying his tax through returns from the sales in the form of VAT. Therefore, implementation of VAT is a best practice and all businesses must ensure compliance with it.
In the US it is also known as a Sales Tax but it is less visible as VAT on items purchased. The amount of implemented VAT is calculated as a pretax. VAT applies to individual business people, banks, organizations and companies as well. However VAT compliance laws vary country to country and can be as less as 5% to as much as 15%. This is why to ensure best practice in international businesses one needs to adapt according to the country’s laws. When it comes to partnership in business, it is a duty on every partner’s part to ensure compliance to avoid risks.
It is a best practice for businesses to submit purchase reports to the government, especially for import and export of products.VAT is applied on all imports which is why imported products attract higher cost. On the other hand exported goods do not carry VAT, which is why selling products within the home country is favored by most businesses.
Compliance Issues with VAT
There are some major setbacks faced by tax payers due to compliance issues. As VAT increases most businesses find it difficult to stick to best practices. The challenges faced include:
Implementation of VAT is an important best practice which businesses are encouraged to comply with.