Value added tax: when do i pay 19 percent, when 7 percent?

Whoever buys something usually pays not only the net price, but usually also VAT. However, depending on the product or service, the amount of value they add can vary. We show when which rate applies.

Overview

Whether you’re buying a carton of milk or a car, you’ll find VAT on your receipt for almost all goods and services, in addition to the net price. Sometimes, however, it is 19 percent, sometimes only 7 percent. During the Corona crisis, VAT rates of 16 and 5 percent were also in effect at times.

We explain what value-added tax is for, what it has to do with sales tax and for which products you have to pay which tax rate.

What is the value added tax?

The Value Added Tax, abbreviated VAT. or Mw.-St., is a tax on the added value that companies create by producing products or providing services. Companies add it on to their goods and services, passing it on to consumers.

So the customers pay a Gross price, which is composed of the actual value of the goods (net price) and the VAT amount. The companies then pay the tax collected to the tax office. Thereby it is called Value added tax Designated.

What distinguishes value added tax and sales tax?

The value added tax is a so-called consumer tax. That is, it should only be charged to the end consumer when he or she buys a product or receives a service.

For this to be successful, the tax must be affordable to entrepreneurs at a passing post become. This means that retailers must be allowed to offset the VAT they themselves pay to suppliers, for example, against the VAT they collect from their customers. It is called input tax deduction.

This prevents VAT from burdening those companies that further process a product, thereby adding value to it compared to the previous stage of production. In addition, the price of the end product does not become disproportionately high, because the VAT only increases as much as the Actual added value within the value chain corresponds.

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In the case of Sales tax On the other hand, this is exactly what does not happen. To calculate it, the complete turnover of each stage of trade or production is used, so if there is a long value chain, it is multiplied.

However, because German sales tax law allows for input tax deduction, the sales tax then equals the value-added tax. The fact that no distinction is usually made between value-added tax and sales tax in normal usage is therefore, strictly speaking, incorrect.

Which products are subject to which VAT?

In Germany, there are two rates of VAT: the standard tax rate and the reduced tax rate. With these percentages one calculates the value added tax (more below).

According to § 12 of the Value Added Tax Act (UStG), the standard tax rate is currently 19 percent, the reduced tax rate 7 percent. The standard rate applies to any taxable net sales – unless they were made with a product or service that was sold at the Basic need count. Then the reduced tax rate takes effect.

Attention: There are two other VAT rates that are less well known. They apply to agriculture and forestry and amount to 10.7 percent and 5.5 percent respectively.

The original idea behind the reduced tax rate was that essential products should remain affordable for everyone. That’s why only 7 percent VAT is charged on many food products. But this basic idea plays only a minor role for many products.

After all, policymakers also use the reduced tax rate to impose certain Subsidize industries and to steer the behavior of consumers in a certain direction, for example in the case of cigarettes, which the state additionally imposes the increasing tobacco tax on.

This steering idea was also behind the Value-added tax cut In the Corona pandemic, when the federal government temporarily reduced tax rates to 16 percent (standard rate) and 5 percent (reduced). Consumers should spend more money through the so tumbling prices to boost the economy through consumption.

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There is also a difference of opinion as to what is included in the basic needs. While for example Cow’s milk the reduced tax rate applies, plant-based alternatives such as Soy or oat milk the standard tax rate. Those with ear problems will be happy to see a Hearing aid with 7 percent value added tax, who has problems with the eyes, pays for a Glasses but 19 percent on top.

The standard tax rate on hygiene products also caused discussion as Tampons and pads, which for many women are clearly part of their basic needs. Since January 2020, this has also been reflected in the value-added tax levied on them: since then, the reduced rate of tax in Germany.

One Selection of products and services, for which the reduced tax rate applies:

  • Books, newspapers, magazines
  • Public transportation with buses, trains, cabs, cable cars and boats within a 50-kilometer radius
  • Tickets for cinema, theater, concerts, sport events, botanical and zoological gardens
  • Certain dental services and dental technology
  • Services of charitable, benevolent and church associations
  • Livestock and plant breeding, livestock farming
  • Short-term rental of living quarters, bedrooms or campsites

The complete list of items subject to the reduced tax rate can be found in Appendix 2 UStG .

Development of value added tax

Value-added tax has existed in Germany since 1968. It was standardized within the EU from 2007 and temporarily reduced during the Corona pandemic. Check out the chart below to see how sales tax rates have changed over the years:

Regular tax rateReduced tax rate
1968 10 percent 5 percent
1978 11 percent 5.5 percent
1979 13 percent 6.5 percent
1983 14 percent 7 percent
1993 15 percent 7 percent
1998 16 percent 7 percent
2007 19 percent 7 percent
1. July 2020 16 percent 5 percent
2021 19 percent 7 percent

When no value added tax is due?

Some goods and services are subject to the Tax exemption. These include rented housing and, among others, services provided by physicians, banks, nursing homes, physical therapists, and freelance journalists. Goods delivered abroad are also exempt from VAT.

But there is also a possibility for other self-employed persons to be exempted from VAT at the tax office: If they have only small sales, they can be exempted from the small business regulation benefit. Then they are not subject to the obligation to add VAT to their products and services.

According to § 19 UStG they have to fulfill two conditions:

  • Their (extrapolated) sales for the previous year must not exceed 22.000 euros and
  • may not exceed 50.amount to 000 euros.

How to calculate the value added tax?

Especially for self-employed persons and entrepreneurs subject to sales tax, it is important to have the Calculate the amount of VAT to be able to. Finally, they must show this on their invoices. But it’s also helpful for consumers to be able to check if the gross price for a product or service is correct.

The formula for this is:

net price + VAT = gross price

  • Example: Hanna would like to buy a pair of glasses. The gross price in the store is 199.98 euros. On her invoice, she sees that 31.93 euros of it was collected as VAT. The pure value of goods (net price) is therefore 168.05 euros. On the other hand, Hannes, a freelance journalist, writes an article that he values at 200 euros. If he sells it to a magazine, he still has to add the reduced tax rate of 7 percent. That makes 14 euros more, so he charges the publisher a gross 214 euros.

If you don’t want to do the math yourself, you can get help: On the net you will find various VAT calculator, with which you can easily calculate either the gross and VAT amount or the net and VAT amount.

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