VAT is actually a value added tax. It is a form of a consumption tax. It is a tax on materials at each stage of its manufacture or distribution or the estimated market value added to a product. This tax is ultimately passed to the consumer from the manufacturer. It is different from sales tax as it is levied only at the point of purchase. This article will describe how to calculate VAT in simple steps.
Maurice Laure, the direction generale des imports (joint director of the French tax authority), was the first person to introduce VAT. It was introduced on April 10, 1954. In the beginning it was directed at large businesses. After some time, it was extended over to include all types of business sectors.
Business can recover VAT on the products and services which they buy in order to manufacture further goods and services which are to be sold to another business in the supply chain or directly to the final consumer. However, personal end costumers of products and services are not able to recover VAT on purchase.
Value added tax was imposed because it creates stronger incentives to collect than a sales tax.
Principle of VAT
The standard method to carry out value added tax includes an assumption of a business which owes some percentage on the price of the product minus all taxes paid earlier on goods. For example if the value added tax rate is 10% then an orange juice maker would have to pay 10% of the Rs 5 per liter price minus taxes paid earlier (let us assume Rs 0.20). Now as per this example, the juice maker is liable for paying Rs 0.30 tax.
Calculation of value added tax
- The easiest way to calculate the value added tax on a purchase is to multiply the price of the item by the rate of the VAT and added to the price of item. For example, if you are in Britain and you wish to buy a sweater for a 100 pounds, and the vat is 18 percent then the VAT will be
VAT = 100 pounds x 18 / 100 = 18 pounds.
Total price paid = (100 + 18) pounds = 118 pounds
- Value added tax can be gained by combining price and VAT also. It can be calculated by multiplying the price of the product by 1 + rate of value added tax. Considering the previous situation once again, you can calculate the VAT as
VAT = 100 pounds x (1 + 18 / 100) = 118 pounds
- Vat can be calculated from total price also. You can work backwards to find out value added tax from total price. Again considering the previous situation, you can take the final cost of the product i.e. 118 pounds and divide it by 1+ VAT rate i.e. 18%.
VAT = 118 pounds / (1 + 18 /100) = 18 pounds.
Related Tags: HOW TO CALCULATE VAT 18%, how to calculate vat tax, calculate vat of 18/100, vat 18% calculator, to calculating 18% vat, steps of calculating vat, sale minus margin than vat amount is, £118 minus vat
Related Content:
I NEED FULL STEPS FOR CALCULATE THE VAT TAX.