What are the general rules on VAT and GST?

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What are the general rules on VAT and GST?

The ultimate purpose of VAT/GST is to impose a broad-based tax on final consumption by households.[1] Typically, VAT/GST is collected through a staged process, which means that each business in the supply chain charges VAT/GST to its customer, regardless of whether the customer is a private individual or a business. In that sense, businesses serve as unpaid tax collectors for the government. They pay to the competent tax authorities the VAT/GST which they charged on their supplies and received from their customers. Since it is not the purpose of VAT/GST to tax businesses, VAT/GST systems employ mechanisms for relieving businesses of the burden of the VAT they pay when they acquire goods or services. Basically, there are two methods to achieve a neutral result for businesses.

Two methods

The first one is the so-called “invoice-credit method”. In this methodology, each supplier in a supply chain charges VAT on each of his supplies. This amount is shown on the invoice to the customer. The customer in its turn can credit that input tax against the output tax charged on its supplies if he is a business as well. Then, the customer remits the balance of the input and the output tax to the tax authorities. He receives a refund if there are excess credits.

The second method is the "subtraction method", which is effectively an accounts-based method.[2] Almost all jurisdictions that employ a VAT use the invoice-credit method. In the OECD, only Japan uses the subtraction method.[3]

The result of both mechanisms is that VAT/GST is in principle not a cost to businesses. However, this cannot conceal that VAT/GST imposes compliance costs and burdens on businesses and administrative costs and burdens on the tax authorities.

Since VAT/GST is levied from businesses with respect to their supplies, all VAT/GST systems contain a definition of what persons must be considered as taxable persons and of what the taxable transactions are on which VAT/GST is chargeable. Furthermore, usually VAT/GST legislation contains a set of rules on the basis of which it can be determined what country is entitled to levy VAT/GST in case of cross-border transactions. Even though VAT/GST is ideally taxed in the country where the private consumption ultimately takes place (taxation according to the "destination principle"), in practice countries sometimes tax goods and/or services in the country where the supplier is established or where – more precisely – the supply originates ("origin principle").

Since the rules for determining what country is entitled to tax a supply are often different for goods and services, it is already important in many jurisdictions to make a distinction between goods and services. Also, it is typical for VAT/GST systems that they contain specific rules on the determination of the taxable amount and rates. Although it goes against the broad-based character of VAT/GST, there are jurisdictions in which certain transactions are exempted from VAT/GST. Furthermore, VAT/GST legislation across the world contains rules on what person is liable to pay the VAT/GST due to the competent tax authorities. To ensure that VAT/GST is not a cost to businesses, any VAT/GST act will contain rules with respect to the recovery/deduction of input VAT/GST.


  1. , OECD International VAT/GST Guidelines ' <http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm> (December 2015)
  2. , OECD International VAT/GST Guidelines ' <http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm> (December 2015)
  3. , Consumption Tax Trends 2014 ' <http://dx.doi.org/10.1787/ctt-2014-en> (December 2015)

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Page contributors

link=http://www.pwc.nl www.pwc.nl
Bertjan Janzen
Tax Partner
Tim Kok
Senior Manager Indirect Taxes
Ad van Doesum
VAT Adviser / Professor
PwC / Universiteit Maastricht

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