Definition
Turnover Tax is a tax imposed on goods and services at different stages of production or supply rather than on the final sale to the consumer. This tax is levied on the gross revenue of a business rather than on its net profit. Unlike a VAT, which allows for tax credits on previous taxable sales, a turnover tax is cumulative, often leading to “tax on tax.”
Examples
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Manufacturing Sector: In a manufacturing setup, turnover tax could be levied at each step of the production process - from raw materials to semi-finished goods, and finally, the complete product.
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Service Sector: In a services environment like consultancy, where services are sub-contracted, a turnover tax would apply at each engagement, increasing the cost structure at every level.
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Retail: Retail businesses purchasing products to sell in stores might face turnover taxes at every stage from distributor to the retail outlet.
Frequently Asked Questions
Q1: How does turnover tax differ from VAT?
A1: Turnover tax is cumulative and is charged at each stage of the production cycle without the possibility of reclaiming previous taxes paid, whereas VAT is a non-cumulative tax where businesses can reclaim previous VAT payments, resulting in consumers bearing the final tax burden.
Q2: Is turnover tax applicable on services as well?
A2: Yes, turnover tax can be applied on services in the same way as it’s applied on goods, taxing every stage of service provision.
Q3: What are the disadvantages of turnover tax?
A3: The main disadvantage is tax cascading, where the tax is applied on tax, leading to higher costs of goods and services. This can distort entrepreneurial behavior and deter investment.
Q4: Are there any exemptions to turnover tax?
A4: It depends on the jurisdiction; some specific goods, services, or sectors may be exempt or have lower rates applied to minimize economic distortion.
Q5: How is turnover tax calculated?
A5: Turnover tax is usually calculated as a fixed percentage of the gross revenue of a business without deduction of any costs or previous taxes paid.
Related Terms
- Value-Added Tax (VAT): A tax on the amount by which the value of an article has been increased at each stage of its production or distribution.
- Sales Tax: A tax on sales or on the receipts from sales.
- Gross Receipts Tax: Similar to turnover tax, it taxes total gross revenues regardless of their source or net income.
- Consumption Tax: Taxes levied on the consumption of goods and services.
- Excise Tax: Taxes paid when purchases are made on a specific good, such as gasoline.
Online References
Suggested Books for Further Studies
- Taxation and Business Planning for Partnerships and LLCs by Jeffrey L. Kwall.
- Principles of Taxation for Business and Investment Planning by Sally M. Jones and Shelley C. Rhoades-Catanach.
- The Economics of Taxation by Bernard Salanie.
- Taxing Ourselves: A Citizen’s Guide to the Great Debate over Tax Reform by Joel Slemrod and Jon Bakija.
- Introduction to Taxation: A Global Perspective by Lawrence A. Wolken.
Fundamentals of Turnover Tax: Taxation Basics Quiz
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