Sales tax, value added tax and input tax are terms that are often used in the context of taxing goods and services. Here are the definitions and differences between these terms:
1. Sales tax
Sales tax (ST) is a consumption tax levied on the sale of goods and services. In Germany, the regular sales tax rate is 19%, while a reduced rate of 7% applies to certain goods and services. Sales tax is paid by the end consumer and paid by the seller to the tax office.
2. Value added tax
The term ‘value added tax’ (VAT) is often used synonymously with sales tax, but it refers to the concept of levying tax only on the added value of a product or service at each stage of production and distribution. In fact, they are the same tax, with ‘value added tax’ emphasising the economic perspective of levying the tax.
3. Input tax
Input tax is the sales tax that companies pay on their purchases of goods and services. Companies can deduct the input tax they have paid from the sales tax they collect on their sales. This ensures that the sales tax is ultimately borne only by the end consumer and not by the companies themselves.
Overview of differences:
- Sales tax: a tax imposed on the sale of goods and services; paid by the final consumer.
- Value added tax: a term used to describe the concept behind sales tax; often used interchangeably.
- Input tax: VAT paid by companies on their purchases that they can deduct from the VAT owed.
Overall, sales tax and VAT are closely related, while input tax is a specific type of sales tax that is relevant for companies.
