sales tax and VAT

Look at a grocery receipt and you will often see a line near the bottom adding a few percent to your total. That line is a consumption tax — a tax on spending rather than on earning. The two most common forms are sales tax, familiar in the United States, and value-added tax (VAT), used across Europe and much of the world, called GST (goods and services tax) in places like Canada, Australia, and Singapore.

A sales tax is charged once, at the final sale to the consumer: the store adds, say, 8 percent at the register, collects it from you, and forwards it to the government. The business is a collector, not the payer. A value-added tax reaches the same destination by a different route: it is charged at every stage of production and distribution, but each business along the chain pays tax only on the value it added, by charging VAT on its sales and subtracting the VAT it paid on its purchases, then sending the difference to the government. If a maker buys materials for 100 plus 10 of VAT and sells the product for 200 plus 20 of VAT, it remits 20 minus 10 = 10. The full burden still lands on the final consumer, but the tax is collected in pieces along the way.

For accounting, the crucial point is that these taxes are not the seller's expense or revenue — they are money the business collects on the government's behalf and owes onward. Sales tax or VAT collected sits as a current liability (a payable) until remitted, and VAT paid on purchases is often recoverable, recorded as a receivable. Mishandling this is a classic small-business error: treating collected tax as if it were your own income makes the books look healthier than they are and leaves you short when the tax is due.