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The consumer’s guide to understanding taxes

Consumption tax is the taxes you pay when you buy something – how much goods or services are consumed by a civilian. In simple words, the consumption tax is the tax you pay when you spend money, and not how much you add to the economy.  

So, what are some common consumer taxes we pay as we buy from stores? These are value added tax, gross receipt tax, excise tax, import duties, and as we all know, the retail sales tax. Consumption taxes are a very popular form and source of revenue for governments. 

Consumption tax has been around for quite some time now on sale and supply of goods. Even though it is as normal and as common as breathing, it is important to understand why there are taxes on things you buy and how the taxation system works. Here are some forms of consumption taxes and how they work.  

Sales tax 

Sales tax is also a form of ad valorem (a tax based on assessed value of any item). Most of us have seen sales tax separately labelled and printed on a sales receipt when we buy something from a store. This form of taxation has an enormous impact on the consumers and where they choose to shop as they are applied to all the goods and services that consumers buy and use. Some governments exempt edible groceries from sales taxes to make it easier for low-income consumers to purchase and have the necessities without breaking their banks.  

Gross receipts tax 

There are several taxes that businesses pay throughout the year, but gross receipt tax stands far because it does not concern itself with the amount of profit a company or an organisation makes. Gross receipts are the total amounts an organisation receives from all sources during its annual accounting period, without subtracting any costs or expenses. Small businesses, at points, are burdened by this tax and the administration has been seeking a new revenue system. 

Value-added tax (VAT) 

Every business with a production chain is subjected to pay the value-added tax. VAT is imposed on the business’ production chain as in each step of production, a certain value is added to the material from the production stage to the final stage. VAT is collected worldwide as more than 100 countries consider it a significant revenue source, but it is levied at the retail level more commonly in European countries. 

Excise tax 

Excise taxes (more commonly known as sin taxes) are imposed on certain types of goods and services bought by consumers. Excise taxes are labelled as sin taxes as they are applied to such products that are seen as harmful to consume and are applied in the hope of lowering the consumption of those goods or services to lower the costs of medical and health care costs. These include gasoline, betting, tobacco, or alcohol etc. 

Import Duties 

As the name suggests, these are levied on imported goods passed on by the importer to final consumers, usually at a higher cost. These taxes depend on the specifications of the goods, like their quantity, weight, or volume, and more importantly, on the country of origin.  

We think that consumption tax can encourage spenders to spend less on luxury and more on investments – making economic growth more efficient. However, there is a significant percentage of consumers that differ with the ideology and would simply prefer to be taxed less on the items they buy out of, in some cases, an extremely limited monthly budget.

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