What is the difference between sales tax and VAT?

Published On: 27 May 2024

By Sam Alex
Sam Alex is a seasoned accountant based in the United Arab Emirates with more than 7 years of experience in VAT consulting. With a keen eye for detail and a passion for numbers, Sam has spent over a decade helping businesses navigate the complex world of finance. His expertise lies in tax planning, financial forecasting, and strategic budgeting.

What is the difference between sales tax and VAT?

Published On: 27 May 2024

Sales tax is a major tax given to the government, which is collected by a retailer when the final sale of their supply chain is made, and the product is bought by the buyer and end user. If you are handling a business and supplying raw materials to businesses, you need to issue a resale certificate to the sellers so that you are not liable for paying the sales tax on the sale and purchase process. The sales tax is a simple tax that is collected from the user indirectly as an end user when he buys a product from different means. The sales tax is an important tax, and it can be levied during sale and purchase. 

The value-added tax is another tax levied from the supply chain, and it is done in different stages. The value-added tax has a much more complex way of working and taking from the tax bracket. The VAT is a tax that all the stages and stakeholders of the supply chain get from their buyers. 

For example, suppliers, manufacturers, distributors and retailers all collect the VAT from each other and from the end user. Businesses that are in the supply chain have to document the transactions and the sale and purchase to keep track of the VAT paid and received for tax purposes. 

These are all the different kinds of taxes that could be levied from

What is sales tax?

Sales tax is a form of tax that is paid to the government for the purchase and sale process. A sales tax amount is an amount of money that is paid to the government for any kind of sale and purchase done between a business and an end-user segment. All the sales and purchases that happen inside a country are under the jurisdiction of the government, and therefore, the businesses have to pay taxes to the government on behalf of the buyers. 

Thus, sales tax is a tax paid on behalf of the buyers by the business organisation. The tax is seen as a percentage of the product’s value that is sold to someone from a retail or business outlet. The sales tax is also included in the final price of the product and is indirect, so the user often does not know what percentage is going towards the tax requirements. The sales tax is usually very easy to calculate, and it is only a fraction of the price of goods. The amount of sales tax depends on the government's tax policies and guidelines. 

There are different types of sales taxes. You can pay the retail sales tax or the wholesaler sales tax, depending on where you buy the product. The retail sales tax is paid when the consumer buys something from a common retail shop or outlet. Manufacturer’s sales taxes are also there, which are levied from certain manufacturers that create specific categories. Sales tax is also often taken from wholesalers, who sell their goods at wholesale prices to different people and supply them to merchants. 

There is a central sales tax act that aims to streamline and bring more uniformity into sales tax collection. The provisions of the central sales tax always ensure that the different kinds of sales taxes from the sale, purchase and distribution of products can be levied without any hassle. The collection and distribution of taxes through interstate trade is governed by the Central Sales Tax Act. 

The guidelines of this act also ensure that the sale and purchase of goods are done properly and through ethical means. The act also categorises different goods and differentiates them depending on their use and importance. The Central Sales Tax Act also resolves any interstate tax disputes so that the sales tax is levied properly and used for good purposes. 

What is VAT?

Value-added tax is a tax taken for value addition, which is where the government takes tax from different stages of the supply chain when the product is valued. VAT is a percentage of the cost of the product and could be levied from consumers and other people involved in the production process. For example, a manufacturer, supplier or vendor can also be asked to pay VAT. 

The VAT increases the cost of a product. What is the difference between sales tax and VAT? The sales tax is paid by the retail customer at the initial sale. However, VAT is paid at each stage of value addition and at the number of stages in the supply chain that brings the product to the user. The payment structure and the overall timing of the payment differ from one tax to the other. 

The Value-added tax is actually distributed all over the supply chain and is not dependent on the final buyer of the product. VAT is an important tax as it helps people contribute towards the tax collection process even though they are not paying any income tax. There are small differences between VAT and sales tax that must be evident now. 


Knowing the taxes you are paying and how they are collected is important to manage your income for better understanding you can consult a VAT consultant . Sales tax and value-added tax are some of the taxes that are commonly collected from different tax brackets. The collection and use of tax is done for the betterment of the state and society. Tax guidelines and provisions are there to ensure that taxes are collected on time and people pay them without losing their money at high prices. The government's tax policy determines the price paid through taxes and other provisions.