How to calculate VAT?
This is a very crucial question. But even before someone tries to calculate VAT, there are certain aspects that a person needs to keep in mind and learn something about the VAT structure. So, what is VAT?
To keep it simple, the definition of VAT can be broken into simple structures which are mentioned below:
- The VAT is nothing but sales tax.
- The VAT is basically a multi-point sales tax and is calculated at the different points of production.
- The VAT is collected at each stage only when the good or service adds value at different stages of production.
- The tax to be paid by the dealer gets deducted from the payable tax which is collected at every point of sale and the already paid tax.
VAT is placed so that the tax burned becomes more equitable on every dealer. This tax makes the taxation method simple and transparent and can be easily computed ensuring that there is better compliance and cost efficiency and thereby avoids distortion in economy and trade.
Here is how someone calculates VAT
There is a simple method of VAT calculation and is basically based on tax credit deduction from tax collected during the period of payment. It can be better understood by the following illustration:
(Rate of tax assumed at 10%).
- Purchase Price: Rs.100
- Tax paid on purchase: Rs.10 (input tax)
- Sale Price :Rs.150
- Tax payable on sale price: Rs.15 (output tax)
- Input tax credit: Rs.10
- VAT payable: Rs.5
Total tax collection by govt.
On the sale price of Rs.100 paid on the purchase by dealer: Rs10
Net VAT paid by the dealer on value addition after resale: Rs5
Total tax at 10% on the last sale price of RS.150: Rs15