June 1, 2023

Business Expense

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How does the input tax deduction correct the VAT system?

The principle of input tax deduction was introduced in order to prevent the tax amount from being added to the product or service again at each stage of production and thus the end product reaching a disproportionately high final price. This enables companies to offset input tax paid from supplier or service provider invoices with the sales tax received. This makes sales tax a transitory item for companies that do not burden the value chain with additional taxes at every single station. As a result, the value added tax only increases to the extent that it actually corresponds to the value added within the value chain. In this way, the end consumers alone bear the VAT burden at the end of the value chain. The tax thus fulfills its purpose as a consumer tax. Using the sales tax calculator is important in this case. 

Within the EU, VAT was standardized in 2006 to relieve producers and retailers and to simplify tax accounting. 120 countries worldwide collect the tax and fill 25% of their tax coffers.

The tax rates for value added tax are specified in the Value Added Tax Act. In Germany, the standard tax rate is 19% and the reduced tax rate is 7%. The regular tax rate applies to all goods and services, while the reduced tax rate applies to everyday goods such as groceries or books. 

Standard tax rate 19%

The standard tax rate of 19% applies to all taxable sales and is added to the net value of the goods or the net performance value. 

Reduced tax rate 7%

The reduced tax rate of 7% applies to sales from the following services, among other things:

  • Livestock and ranching
  • Plant breeding
  • Dental technology
  • certain dental services
  • Tickets for theater, concerts, museums, cinema and botanical or zoological gardens
  • Granting, Transfer and Use of Copyrights
  • Services of charitable, charitable or church associations
  • Passenger transport by train, S-Bahn, taxis, cable cars and ships with less than 50 km
  • Rental of living rooms and bedrooms or campsites for short-term accommodation

When is no VAT due?

Entrepreneurs with low conversions to the status of small business owners think. Small business owners are exempt from collecting the tax from their customers. They can pass on their goods or services to their customers at net value without adding VAT.  Small business owners can therefore offer very attractive prices from which private customers in particular can benefit. 

Members of certain medical professions do not have to charge their customers any VAT regardless of their sales. This includes, for example, doctors, dentists, naturopaths, physiotherapists and other medical professions.

What types of VAT are there?

There are three different types of tax:

  • The product type is raised on capital goods.
  • The income type can only be offset against losses in value.
  • The type common today is the consumption type.

It will be charged without restriction. In Germany and Austria this type applies, which in Germany pours between 15 and 20 billion euros per month into the tax coffers. At the same time, the economy benefits from the unified system, which currently taxes goods at 19% and everyday goods at 7%? The sales tax that companies have to pay when purchasing at the purchase price is also 19%. If a net price is shown for purchases, the tax must still be added to it.

What is the difference between input tax and VAT?

Input tax and sales tax, like sales tax, refer to the same type of tax from different perspectives. While VAT is to be paid by the end consumer, the tax that an entrepreneur pays is known as input tax. Taxable companies have to collect sales tax in the form of sales tax from their customers and also pay sales tax themselves on their supplier invoices. However, companies can offset the sales tax they have paid with their sales tax liability as what is known as input tax.