What is sales tax and excise tax
VAT, sales tax & input tax
Definition: what is sales tax?
Sales tax (VAT) is a tax levied on the sale or exchange of products and services by businesses. According to Section 12 of the Sales Tax Act, sales tax is 19%. The reduced tax rate of 7% applies to certain goods and services.
The price for a product including sales tax is also referred to as the gross price, the price excluding sales tax as the net price:
Net sales price + sales tax = gross sales price
NEW: All important information about the 2020 VAT reduction in the wake of Corona
In order to gradually stimulate the German economy, which has been affected by the Corona crisis, the federal government decided on an economic stimulus package at the beginning of June 2020. Its core component: a temporary VAT reduction that will come into effect on July 1, 2020 and should apply until December 31, 2020.
The rates are reduced within this period as follows:
a) Standard tax rate: from 19% to 16%
b) Reduced tax rate: from 7% to 5%
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An overview of the objectives of the economic stimulus package
It is hoped that the temporary lowering of VAT will primarily benefit the Consumption stimulated again becomes. The federal government is pursuing the goal of ensuring that companies do their Offer goods and services cheaperso that customers can make purchases this year that would probably not have been concluded in 2020, but rather in 2021 at the earliest.
If customers buy more again due to the Corona VAT reduction, this should lead to the following developments in the coming months:
- The Demand is increasing clear
- The Unemployment will be curbed
- Companies are doing it again more sales and profits
As an entrepreneur, you have these options when it comes to reducing VAT
Are you an entrepreneur and don't know how to deal with the 2020 VAT cut? Basically, you have three different options:
- Your customers benefit from cheaper goods and services
- You are giving your customers more incentive to buy more or earlier than planned
- You only feel something in terms of profit and liquidity if your customers actually buy more in the second half of the year
- They keep the tax cut and keep prices stable
- You benefit from higher earnings with the same sales figures and prices
- You only pass part of the tax cut on to your customers
- On the one hand, your customers benefit from cheaper goods and services - you also benefit from higher earnings
The Federal Government made the decision to lower VAT primarily from an economic point of view, which means that it expects a positive mass effect. However, you have to decide for yourself from a business point of view what is the best choice for your company - and whether you will pass the reduction in VAT 1: 1 on to your customers in the course of this, or whether you would rather not change your prices in order to avoid the reduction yourself to benefit. There is no patent recipe for this. Above all, you should carefully weigh up your options if your buyers are private customers.
A exception only applies to so-called Continuing obligationswith fixed prices (e.g. mobile phone contract). Usually there is here fixed net priceson which the VAT is added. From July 2020, customers should automatically benefit from the VAT reduction to 16%.
Tips for reporting VAT: This way you won't make mistakes
There are also a few pitfalls for entrepreneurs when it comes to reducing VAT:
- Don't forget to rearrange your cash register!
If your receipts or receipts say that 19% VAT has been reported, then you are automatically obliged to actually pay the full rate.
- Check whether you are issuing invoices to companies that are entitled to input tax deduction!
Do you send invoices to companies that are entitled to deduct input tax? If so, it is important to remember that your beneficiaries can only deduct 16% input tax between July 1st and December 31st. If you continue to issue invoices with the old rate, you still have to pay the full 19%.
In these cases, you should make sure to report the reduced tax rate in any case. This ensures that you don't accidentally hang on to it at the end!
Different definitions of sales tax
What? Who? For what? Depending on the question, there are countless definitions for sales tax.
These definitions describe sales tax.
Sales tax is a ...
What is sales tax charged on?
Sales tax burdens the consumption of goods and services by taxing the exchange (traffic) of these services.
Who receives the sales tax?
The sales tax accrues to the federal, state and local governments - but not in equal parts. The distribution of sales tax is currently regulated as follows:
- Federal share: approx. 52%
- Share of countries: approx. 46%
- Share of municipalities: approx. 2%
The sales tax is thus an important source of income for the German federal state.
Who pays the sales tax?
Since the direct calculation of sales tax is not technically possible for every consumer, the tax payer and tax payer are not identical.
The sales tax is passed on from the tax debtor (e.g. company) to the taxpayer (consumer). This means that the sales tax is levied by the company on the goods and services sold and paid to the tax office. However, the consumer bears the actual tax burden.
Who has to pay the sales tax?
The actual tax burden always lies with the end consumer, as he does not get the sales tax refunded by the tax office.
What does sales tax mean for companies?
Companies are only allowed to withhold the net price of their products sold. You collect the sales tax from the customer, but you have to pay it to the tax office. At the same time, as an entrepreneur, you can claim sales tax from the tax office, which you pay, for example, on purchased goods or services (input tax).
For companies, sales tax is a transitory item. Since the end consumer bears the actual tax burden, the Sales tax for companies is not profit or loss.
What is the difference between sales tax and sales tax?
The two terms sales tax and sales tax are often used synonymously in Germany, whereby the correct term for tax law is "sales tax". However, VAT has not only established itself as a slang term, but is also often shown as VAT on receipts and receipts. The term value added tax is actually derived from the form of taxation. Because the sales tax is calculated according to the "value added principle". Input tax is also a value added tax.
Definition: what is the VAT principle?
The term value added tax is derived from the value added principle that has been in force in Germany since 1968. Accordingly, every company only pays sales tax on the value added that it generates through the sale of a product or service (difference between purchase price and sales price). One also speaks of the so-called input tax deduction.
Sample calculation for VAT:
If a kitchen studio purchases a kitchen to the value of € 8,000 net and sells it to the value of € 11,000 net, sales tax is only due on the value added of € 3,000.
- Gross purchase price:
€ 8,000 x 1.19 = € 9,520
- Input tax:
€ 9,520 (gross) - € 8,000 (net) = € 1,520
=> The tax office owes this amount to the company.
- Gross sales price:
€ 11,000 x 1.19 = € 13,090
- Value added tax:
€ 13,090 (gross) - € 11,000 (net) = € 2,090
=> The company owes this amount to the tax office.
The tax burden results from the difference between sales tax and input tax:
2.090 € – 1.520 € = 570 €
Your company has to pay this amount of VAT to the tax office as input tax. You can find more information on this principle under "The input tax deduction".
VAT rates in Europe
The VAT rates within Europe differ greatly from one another. The standard tax rate in Germany is one of the lowest. Because in most European countries, VAT is taxed at 20% and more. In Hungary the normal rate is even 27%, while in Switzerland only 7.7% is taxed.
Value added tax in comparison: The standard tax rate is very different in Europe.
What is input tax?
The input tax is the complementary to the sales tax. Companies must pay input tax when purchasing products or services. It is therefore the VAT that is charged to a company on incoming invoices from other companies.
What is the difference between input tax and sales tax?
Whether VAT is viewed as input tax or sales tax depends on the perspective. From the company's point of view, input tax is the tax that was levied on incoming invoices. The company levies sales tax on outgoing invoices.
- Input tax: traffic tax on incoming invoices (purchase)
- Sales tax: traffic tax on outgoing invoices (sales)
The difference between sales tax and input tax simply explained
That means: The input tax that your company pays on purchased products is also sales tax - namely from the point of view of the seller or supplier. The tax rate is therefore always the same for the same product, regardless of whether it is input tax or sales tax. In Germany, the standard tax rate of 19% applies.
The input tax deduction: offset sales tax with input tax
The input tax deduction allows companies to offset the sales tax to be paid with the input tax. This means that they can claim input tax on purchased products or services when they register for VAT in order to reduce the payment burden.
Find out more about input tax deduction here.
Who is liable for sales tax?
What does VAT mean?
Sales tax liability means that companies charge sales tax for the sale of goods and services, i.e. show sales tax on your outgoing invoices and pay it to the tax office.
In principle, all companies are obliged to pay sales tax to the responsible tax office. Conversely, this means that they are also entitled to input tax deduction, i.e. they can claim input tax as part of the advance VAT registration with the tax office.
Who is exempt from VAT liability?
Small business owner can be exempt from sales tax. This means that you do not have to show sales tax on invoices and therefore do not have to pay it to the tax office. But that also means that you are not entitled to the input tax deduction.
Small business regulation
Companies with an annual turnover of less than € 22,000 in the past calendar year can make use of the small business regulation (§ 19 UStG). However, anyone who opts for this regulation is bound by it for 5 years. The decision to tax should therefore be carefully considered by small business owners.
Also some professional groups are exempt from sales tax. These include B. Doctors and Insurance Brokers.
Sales tax: 7% or 19%?
In principle, every service and every product sold is subject to 19% sales tax. Because this has been the standard tax rate applicable in Germany since 2007. However, there are some exceptions to which the special tax rate or the reduced tax rate of 7% applies.
Reduced sales tax rate of 7%
The reduced sales tax rate of 7% generally applies to products and services that are part of the basic human needs: especially food for basic needs.
Examples of the reduced sales tax rate (7%):
- Groceries (with a few exceptions such as delicacies)
- Take-away meals in the restaurant (meals consumed on site are taxed at 19% VAT)
- Products protected by copyright (e.g. books, images, texts, newspaper articles, brochures)
- Works of art (e.g. paintings, sculptures)
- one-off performances (e.g. theater performances, museum tickets, circus performances)
- Hotel overnight stays
- Tickets in local public transport (e.g. for buses, trains, trams, taxis)
7% or 19% VAT? Examples of the standard tax rate and the reduced VAT rate
Many exceptions in the sales tax law
The reduced tax rate is relatively difficult to record as there are many exemptions. This is why the German Value Added Tax Act (UStG) is repeatedly criticized.
Here are some examples:
- At the local public transport (ÖPNV) the radius is crucial. Journeys by train, bus, tram or taxi within 50 km are subject to the reduced sales tax rate of 7%, while journeys over 50 km are taxed at the standard tax rate of 19%.
- milk is taxed at 7%. However, this only applies to cow's milk! Soy milk or even lactose-free milk are taxed at 19%. It gets even more complicated with mixed milk drinks: Here the reduced VAT rate only applies if they consist of at least 75% milk or milk products.
- At drinks The following applies: water, coffee and tea are part of the basic supply. 19% sales tax is charged for all other drinks.
- Equally paradoxical: Fruits, fruits and vegetables are usually also taxed at 7%. For fruit juices, however, the standard tax rate of 19% is levied.
Therefore, find out exactly which products and services fall under the special regulation. A complete list of the items that are subject to the reduced tax rate is contained in Appendix 2 of the Sales Tax Act.
VAT-exempt products and services
There are even some services that are completely exempt from sales tax. This includes:
- Some medical, health and care services
- Postage and other sales from postal companies
- Some achievements in the education sector
- Scientific achievements
- Certain cultural events
- Brokerage of financial or credit services as well as insurance
- Sale, rental or leasing of land
Posting records: post sales tax correctly
Based on an example we show in 4 stepshow the posting of sales tax and input tax (for purchases and sales) works.
- Calculation of sales tax and input tax
- Affected Account Types
- Posting rates for posting sales tax and input tax
- Closing the accounts (input tax deduction)
1. Calculation of sales tax and input tax
A kitchen studio purchases a kitchen worth € 10,000 (net):
After processing, the kitchen studio sells the kitchen to the value of € 12,000 (net)
These amounts must be posted to the relevant accounts in accounting.
2. Account Types Affected
When booking the purchase of goods in double-entry bookkeeping, the following accounts are affected:
LuL = deliveries and services
This list of accounts and the corresponding inflows and outflows helps when creating the posting records.
3. Posting rates for posting sales tax and input tax
The posting rates for the previous calculation example are as follows:
4. Closing the accounts (input tax deduction)
The final tax liability is determined with the input tax deduction. For this, the affected accounts are closed.
The input tax account is a sub-account of the sales tax account. The account with the lower balance will be transferred to the account with the higher balance:
- Sales tax> input tax: Completion via sales tax account
The booking rate is: input tax on sales tax
- Sales tax : Completion via input tax account
The booking rate is: VAT on input tax
In our example, sales tax is higher than input tax. The input tax account is therefore closed via the sales tax account. The balance is transferred to the debit of the sales tax account. This means: On the sales tax account there is a liability to the tax office of € 380 (tax liability).
If - unlike in the example - the sales tax were lower than the input tax, the balance of the sales tax account would be transferred to the input tax account. The balance is in credit on the input tax account. A claim against the tax office arises. So you get a VAT refund.
If the sales tax is higher than the input tax, a tax liability arises, in the opposite case there is a refund.
The advance VAT return (UStVA)
What is the VAT return?
With the advance VAT return, the tax liability of companies is divided into partial payments. As a result, the annual tax burden for companies is not too high. At the same time, the state benefits in that it has more regular tax revenues and has to pay less interest.
Who has to make a VAT return?
In principle, all traders and freelancers have to make a regular VAT return. Few are exempt from it.
These companies must no advance VAT return do:
- Certain professional groups such as doctors or insurance brokers
- Companies that apply the small business regulation
- Companies whose sales tax was less than € 1,000 in the previous calendar year only need to submit a sales tax return
What are the deadlines for the VAT return?
As a rule, registration takes place monthly or quarterly, on the 10th of the following month. The advance VAT return for the first quarter of the year must therefore be made by April 10th at the latest.
Submission deadline = payment deadline
The deadlines do not only apply to the submission of the advance VAT return. These are also the deadlines for paying the VAT liability. The calculated advance payments must be transferred unsolicited to the tax office or paid by direct debit.
Monthly or quarterly advance VAT return?
Whether the UStVA has to be made monthly or quarterly depends on the amount of the tax burden. Business start-ups are treated separately. These must submit the UStVA monthly in the first two financial years.
What is your monthly sales tax burden?
How does the advance VAT return work?
The input tax is claimed online via the ELSTER portal or accounting software. To do this, the UStVA form must be completed. In this form you enter how much sales tax you have already paid in advance and how much sales tax you have received during the reporting period. Both values are offset.
If your company received more sales tax than input tax, you must transfer the difference to the tax office as an additional payment. Otherwise, you will receive a VAT refund from the tax office.
VAT, sales tax & input tax summarized
- With the sales tax, the Exchange of products and services taxed.
- The sales tax is in Germany 19% (standard tax rate). Products and services for basic needs are shipped with the reduced sales tax rate of 7% taxed.
- The Input tax is the sales tax that is shown on incoming invoices - i.e. when purchasing products.
- In principle, every company is subject to sales tax. Small business owner (Annual turnover <17,500 €) can be exempted from this, but are then not entitled to input tax deduction.
- Through the Input tax deduction companies can offset sales tax and input tax in order to then only pay the difference to the tax office.
- Businesses are required to do so on a regular basis VAT returns (per month or quarter).
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