What is Value Added Tax and How to Calculate It?

All of you have probably visited a nearby market or store to purchase food and other supplies for your daily lives. The price you pay when making a grocery store purchase is not the one that has been issued as the item’s actual retail price. 

Each stage of the selling process is subject to value-added taxes. From the producer to the supplier, then to the retailer, and at last to the consumer, VAT is paid at each stage. So, it is important to do VAT calculations. 

Any form of taxation is when the government imposes fees on goods, services, and transactions. It is among the greatest powers that each government in a nation has. A variety of taxes, including VAT, are levied at different points during the sales of goods or services. The government earns money through these taxes.

What is VAT (Value Added Tax)? 

Value-added tax, or VAT, is a type of indirect tax that is charged on goods and services for the value added at every step of the production cycle, from the raw materials to the final retail sale. On April 1, 2005, VAT was put into place.

Under it, at each step, the sum of value added is first calculated, and then tax is put on that amount. In the end, the full VAT is paid by the person who buys the goods, while vendors at earlier stages of the process get their tax money back. VAT is also called a consumption tax because the whole tax is paid by the consumer.

VAT Calculation

VAT is an indirect tax that can only be paid to the government by the companies that make the goods and services. Since VAT is not a direct tax, it is important to do VAT calculations correctly and precisely for a clear tax payment process. 

It is easy to calculate VAT: just subtract the input tax amount from the output tax. 

VAT = Output Tax Amount – Input Tax Amount

This formula is a simple way to figure out VAT. You can also use an online VAT calculator to do VAT calculations. 

How An Online VAT Calculator Works

You can calculate the VAT amount and the tax payable using the online VAT calculator. All you need to know to calculate VAT is the VAT rate. You can figure out exclusive and inclusive VAT with the aid of the online VAT calculator. 

Exclusive Of VAT 

The price you enter in this case is the actual cost of the good or service, without regard to any additional taxes. When you choose an exclusive of VAT, the formula below will be used to calculate the VAT rate. 

Taxable Value = VAT Rate/100 

Inclusive of VAT 

In this case, VAT is included in the amount or price quoted. So it includes both the price of the product and the VAT. The VAT amount can be calculated using the following formula when the price given is inclusive of VAT: 

VAT amount = Value inclusive of tax *tax rate/ (100 + tax rate)

Taxable Value/Price = Value inclusive of tax*100/ (100 + tax rate)

What are Input VAT and Output VAT? 

The input VAT and output VAT concepts form a large part of the base of VAT. Let’s use examples to understand it. 

Output VAT

Output Tax is the name given to the tax derived from the sale of products or services. Traders, for instance, sold goods for Rs 1,000,000 plus 5% tax. The 5,000 tax that A Traders has been collecting is an output vat. 

Input VAT

Input Tax is the name for the tax that is paid when goods or services are purchased. For instance, a distributor sold goods to traders for 50,000 plus a 5% tax. The 2,500 tax that A Traders paid as an input tax.

How is VAT payment calculated? 

Although VAT-registered businesses must pay VAT, this does not mean they must pay all of the VAT that was gathered from sales. The formula to use in calculating the VAT owed to the government is shown below. 

VAT Payment = Output VAT minus Input VAT

Calculate the total output VAT that was received during the taxable period and the total input VAT that is eligible for reimbursement. Apply the formula above after calculating the input VAT and output VAT. 

The difference would be the amount of VAT due if the output VAT is higher than your input VAT. If the output VAT is lower than the input VAT, the difference will be reimbursed, and no VAT will be due as a result.

Benefits of VAT 

Only a small number of nations classify VAT as a tax. Only a few nations, including India, treated VAT like a tax. Since goods and services are now taxed even at the local level thanks to the advent of VAT, a transparent system for paying taxes has been formed. Here are some of the many benefits of the Indian VAT system: 

• The fact that VAT is charged at every point where goods and services are bought and sold makes it difficult for people to evade taxes, which helps in promoting transparency. 
• A sizable portion of tax revenue is collected when VAT is applied consistently. 
• It improves tax policy and closes the fiscal policy gap. 
• Out of 193, a total of 160 nations use the VAT method for taxation. 
• A good relationship with other nations is encouraged by the widely accepted tax system known as VAT, which promotes international trade. 
• The process of paying taxes is made more effective and simple because VAT keeps a close eye on all transactions.

Conclusion

One of the most efficient tax systems is VAT. As a consumption tax, it generates significant revenue for governments in developing and underdeveloped countries. Tax evasion is more difficult to avoid with VAT than with sales tax. It brings the country’s tax system into balance. It also ensures the process’s fairness and consistency. Also, you should calculate your VAT by using an online VAT calculator. 

For more details, you can visit the Piramal Finance website and explore their products and services.