Taxes of any kind refer to the process of government charging fees for products, services, and transactions. It is one of the most important powers that the government of every country has. Value Added Tax is one of the many forms of taxes that are applied at various stages of the sale of goods and services.
Value added taxes are applied to every step of the sales process. VAT is added to the price at every step, from the manufacturer to the wholesaler, then to the shopkeeper, and finally to the consumer.
What is value added tax?
Value Added Tax (VAT), is a consumption tax levied on goods at every stage of the manufacturing process, from labor and raw materials to final sale. The amount of VAT paid by the user is calculated based on the cost of the product, less any expense for materials used in the product that have already been taxed.
VAT is collected on taxable transactions by suppliers of raw materials, manufacturers, distributors and retailers. These suppliers, manufacturers, distributors, retailers and end consumers pay VAT on their purchases, as do suppliers, manufacturers, distributors, retailers and end consumers.
While VAT is levied on the sale of products and services and paid to the government by producers, the actual tax is levied on customers or end users who purchase these goods and services. As a result, it is an indirect tax that customers pay to the government through manufacturers of products and services.
How is Value Added Tax (VAT) calculated?
Take the amount of VAT at the most recent stage of production and subtract the VAT already paid to calculate the amount of VAT that needs to be paid at each stage.
The difference between input and output taxes is used to calculate VAT.
"Output Tax - Input Tax = Value Added Tax"
Where output tax refers to the tax paid by the seller on the sale of his products and services, and input tax refers to the tax paid by the seller on the raw materials used to create his goods and services.
Now let us explain to you what input and output taxes are:
All taxes that the consumer pays to the retailer for the goods they buy is called output tax. This has to be estimated on the basis of both commercial and consumer sales.
When goods or services for personal use are withdrawn from a registered company, output VAT must be calculated. Unless the goods in question are capital goods which fall outside the scope of the VAT adjustment rules, VAT must be calculated on withdrawals if the goods are withdrawn for a use that is not subject to VAT under the VAT law.
The tax that merchants pay on their purchases is known as input tax. Many of their purchases will be subject to VAT; But, in most cases, they will be able to request a VAT credit. Input tax includes VAT on capital items such as equipment and machinery, as well as the purchase of raw materials and goods for resale.
Total amount of the invoice (VAT included):
VAT included is common for retailers who offer their products or services directly to consumers, where the value of the product or service is usually included in the value of the tax.
Tax = product price including tax - original product price without tax
Calculating the total amount including tax (VAT not included):
When calculating Excluded Tax, various factors that are applied to goods and services must be taken into account. And this tax must be calculated accurately, because it forms part of the net profits of the company (and by companies here we mean those that work in the manufacturing and production sector, which deal with products in stages that precede the final consumer by two or three cycles)
To determine the amount of tax not included, the required percentage of the total price must be determined, which is a predetermined percentage that is applied to the total price of the products and services sold.
Tax = tax rate * product cost
Product inclusive of tax = basic product price + tax