VAT, Sales Tax and Turnover Tax: What Is the Difference?

In this post I will not say anything about my view of the proposed initiatives. I think the theory behind each type of tax needs to be explained first.

VAT: value-added tax

Value added is the increase in the value of goods, works and services (GWS) that a company creates when it modifies, alters, produces or resells them. In other words, it is the market value of the product you have made, minus the resources purchased from other companies to produce or resell it.

Accordingly, value added can be calculated by the direct method (profit, wages and taxes) or by the indirect method (output at market prices minus purchased resources).

Because the indirect method is easier, VAT is calculated as the tax rate multiplied by revenue, minus the VAT paid on purchases of GWS.

In a normal economy, then, every economic agent pays tax only on the value it adds, but the amount of tax is always passed on to the next link in the chain, and so on to the final consumer. In the end, the entire amount of tax is included in the price of the final product bought by the final buyer, that is, the consumer.

To compete with other countries in their markets and avoid paying this tax twice (first at home and then abroad), VAT is not charged on exports, and the VAT a producer paid when buying GWS for its own production is refunded by the state. VAT is therefore not included in the cost of production and is always passed on to the final consumer.

Sales tax

For some reason, the Kazakhstani version of the sales tax is called the "retail tax."

In its classic form, a sales tax is levied only on retail sales, in other words, on sales to the final consumer. If the VAT and sales tax rates are the same, the amount of tax is identical. The difference is that the tax is not applied at each stage of value added; the final product is taxed at once.

A sales tax is convenient because it is easy to administer, but it has drawbacks. The main one is the difficulty of distinguishing a sale to a final consumer from a sale to an intermediate consumer, who uses the good, work or service to produce further GWS. That is why VAT dominates in many countries: it guarantees that the entire tax is passed on to the final consumer and does not end up in the cost of production.

Turnover tax

For some reason, the Kazakhstani version of the turnover tax is called the "sales tax."

Turnover tax is the simplest tax in terms of calculation and administration, but also the most unfair and the one that distorts the economy most. I will come back to that in later notes.

It is calculated very simply: revenue multiplied by the tax rate. The entire tax goes into the cost of production, creating a cascading tax, that is, a tax on tax. Because the GWS a company buys for its own production already contain turnover tax, the tax is multiplied in cascade when the product is sold on.

This is its main drawback: the more stages of processing and resale a product goes through, the higher the total tax burden on the final consumer.

The pros and cons of each tax will be covered in a separate post.