What is VAT?
A Question Mark in Everyone's Mind: The Invisible Tax That Feeds the Government’s Infrastructure
Soon enough, we have all seen those letters together: VAT. The funny thing is, the number of people who don’t understand what VAT is, especially those who constantly come across this tax in daily life, is far greater than those who do. We brush it off by saying, “It’s just a tax added to the price of everything,” but when we look into it a bit more, it’s not hard to see how VAT actually affects the life of every individual and business. So, what is VAT and what does it actually do?
Let’s take a closer look.
VAT: The Basic Definition
VAT, or Value Added Tax, is a consumption tax added to the price of every sold product or service. It is collected from the buyer and sent to the government treasury. VAT is applied at every stage of the process, from production to consumption, as value is added. This means that at every sale, a tax is levied on the increase in value of the product. The goal is to transfer this tax ultimately collected from the consumer to the government’s treasury.
For example, a product produced in a factory is sold to a supplier with VAT. Then, when it is sold to retailers, VAT is applied again, and finally, when sold to the end user, VAT is added. At each step, the VAT added to the value of the product is ultimately paid by the end consumer.
How VAT Works: How Does it Function?
As far as we know, VAT is actually everywhere. Whatever store you walk into, whatever restaurant you choose, the price of the service you receive includes VAT. But this tax doesn’t just go into the government’s treasury; businesses collect it as well. In a way, VAT creates a direct relationship between the buyer and seller, affecting both parties.
When buying a product or service, 20% of the price is added as VAT. In Turkiye, this rate has recently increased from 18% to 20%. While this rate applies to many products and services, some products and services have reduced rates. For example, some basic foodstuffs and healthcare services may have lower VAT rates. But in general, 20% of the price you pay as a consumer is VAT.
Is it that simple? Actually, no. VAT always involves a certain calculation process. The tax continuously changes for businesses that modify product prices, source goods from abroad, export, or deal with imports. For example, VAT rates may vary across sectors. In industries like healthcare, education, and food, the rates may be lower. But the VAT affecting the price of a bottle of water can be much more complex than you think.
Contributions of VAT: Economic Benefits
So, what is the impact of VAT on the economy? It's quite simple: It’s a source of government income. Value Added Tax holds an important place in the government's budget. In addition to sources of income like income tax and corporate tax, VAT forms an important financial pillar in developing countries like Turkiye. This is because the government earns income from VAT during every consumption transaction.
This may seem like a hidden tax, but in fact, the vast majority of the public pays VAT indirectly through their salaries, bills, and daily shopping. In other words, the government takes a portion from everyone, from the richest to the poorest.
On an individual level, VAT may seem like a tax that doesn’t directly affect a person’s life. But the real impact is seen in the infrastructure investments the government funds through this tax. VAT revenue is spent on public services like education, healthcare, transportation, and security.
Criticisms Under the Shadow of VAT
But, like everything else, VAT has its critics. Initially, it may seem fair, but value-added tax often becomes a heavy burden for low-income individuals. This is because people with low incomes pay more VAT when purchasing goods and services. Meanwhile, high-income individuals, although they spend more, end up paying a lower percentage of tax because most of their income remains outside the tax net due to investments or savings.
As a result, VAT is often considered a regressive tax. This means that for a person with low income, especially those close to the poverty line, the VAT they pay during each consumption represents a larger proportion of their income. This increases the system's inequality. For example, a person living on the minimum wage pays as much VAT as the price of a mobile phone, which constitutes a significant portion of their income. However, for a high-income person buying the same phone, the VAT represents a very small part of their income.
VAT’s Impact on Companies: Challenges at the Business Level
VAT is another headache for business owners. A company is obliged to pay VAT to the government. However, the company can also reclaim the VAT it has paid on the goods and services it has purchased. That is, VAT paid to suppliers can be deducted from the company’s account with the government. But this process requires constant monitoring because the VAT for every product and service needs to be calculated correctly. Meeting VAT obligations can be a bureaucratic burden for businesses.
Additionally, some small businesses are forced to spend time and effort registering and paying VAT for every purchase. This can negatively affect business processes. Therefore, the number of businesses calling for VAT reform and a tax system with fewer bureaucratic obstacles is increasing every day.
History of VAT: When Did it Start?
VAT was first introduced in France in 1967 and was quickly adopted worldwide. At that time, VAT aimed to replace income tax in developed countries. In Turkiye, VAT was introduced legally in 1985. Since then, the rate of VAT has increased and changed over time.
Initially, the VAT rate in Turkiye was 10%, but in the 2000s, it was raised to 15%. Subsequently, particularly due to changes in Turkiye’s economic and financial structure, the VAT rate was increased to 20%. Therefore, the decisions to raise the VAT rate have been shaped by factors such as inflation, economic growth, and the public’s sensitivity to taxation.
VAT and the Tax Burden in Turkiye: Alleviating the Worries of Businesses and Citizens?
The increase in Turkiye’s VAT rate to 20% not only shows that the tax burden has increased but also indicates that the economy has become more difficult. In many developed countries, the VAT rate is much lower compared to Turkiye. For example, in Germany, the VAT rate is 19%, and in France, it’s around 20%. However, the tax systems in these countries operate more transparently and fairly, without layers like Turkiye’s. In Turkiye, where high taxes are collected, basic needs like social security and healthcare services are still not provided adequately. This puts people already burdened by taxes in an even tougher situation.
Tax reforms can help reduce the burden on businesses and citizens, but it’s also true that the government must face this system, which always brings a load to the tax offices in order to generate income.
Published: Friday, August 2, 2024 16:31
