What Is Value-Added Tax (VAT) in Commercial Real Estate?

By Published On: August 3, 20213.7 min read

In the real estate world, value-added tax (VAT) is a consumption tax imposed on properties whenever it adds value. The amount of VAT the end-user pays is based on the cost of the property acquired instead of the appraisal.

Universally, the government is burdened with the obligation of making some basic infrastructure available for its citizens. In their 2009 book “Principles of International Taxation,” authors Miller and Oats stated that due to the inadequacy of the private market, the availability of public goods, such as the safety of life and property, which the citizens are not ready to pay for directly, are left with the government to take care of.

With the recognition of the ineffectiveness of heavy dependence on a few revenues, countries are taking giant strides to refocus their revenue generation strategy by focusing more on other gains. To generate more revenue, the implementation of the tax regime by the governmental bodies ensures that more income is derived from taxes.

History of the Value-Added Tax

Value-added tax (VAT) is also known as the Goods and Services Tax (GST). It is charged on the additional value that results from each trade. VAT was devised by French economist Maurice Laure in 1954 and was first made known in France on April 10, 1954. The French VAT was a revolution of the current French invention tax — initially, the system comprised two different taxes.

Subsequently, VAT was introduced in Britain in 1974 at a standard percentage of 10. VAT has become gradually complex because of all the different rates charged on properties and facilities.

How Does a Value-Added Tax Work?

When properties or facilities are acquired, VAT is included. To the same extent, when businesses charge VAT on properties and facilities, it generates a supplementary level of accountability and compulsion to the tax authorities, as that tax must be paid to the appropriate body and not reserved or measured as a bonus income by the business.

Value-added tax is usually a proportion of the sales price. For instance, if you buy a pair of shoes for $200, and the value-added tax rate is 20%, you must pay $40 as VAT when you pay for the shoes.

Value-Added Tax vs. Sales Tax

Sales tax and VAT are kinds of indirect tax. Indirect tax is a tax collected by the seller who charges the buyer at the time of procurement and then remits to the government in place of the buyer. Sales tax and VAT are a collective cause of misunderstanding within the commercial tax community.

Sales tax is collected by the trader when the ultimate sale in the supply chain has been reached. In other words, end customers pay sales tax when they buy goods or services. When purchasing materials that will be resold, industries can issue resale records to sellers and are not accountable for sales tax.

On the other hand, VAT is collected by all traders in every stage of the supply chain. Every trader involved in the supply chain collects VAT on taxable sales. Likewise, traders in this chain pay VAT on their purchases. Under a VAT administration, tax authorities collect tax income all through the supply chain.

Pros of VAT

  • VAT encourages individual savings and investment.
  • It helps to make up revenue. VAT is crystal clear and is a slight liability to consumers as it is collected in lesser fragments at various stages of production and distribution. VAT is centered on ‘value added,’ not on ‘total price.’
  • VAT offers the economic advantages of a tax that comprises the total price within its scope. At the same time, the direct reimbursement of tax is spread out.
  • VAT gives the government the privilege to return into the tax scheme all the entities that were given tax exemptions.

Cons of VAT

  • VAT has been condemned to be a burden on individual end-consumers of products and is therefore referred to as a regressive tax.
  • Revenue from value-added taxes is often lower than anticipated because they are challenging and costly to administer and collect.
  • VAT contributes to a price increase. In developing countries, some capitalists take hold of every opportunity to raise prices, and the introduction of VAT offers such an opportunity for them.

With regards to the fundamentals, VAT applies to all supplies of goods and services. VAT is evaluated and collected on the worth of goods or services that have been made available every time there is a transaction. The trader charges VAT to the buyer and remits it to the government.

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