What is Value Added Tax and How is it Calculated

Updated on July 20, 2022

What is Value Added Tax and How is it Calculated

Although indirect taxes such as VAT were replaced by the GST in 2017, numerous distinct products are still not included by the new system. Such goods are still subject to VAT. To learn more about VAT and how it’s calculated, see this post.

Taxes are a vital part of any country’s economic framework. At various stages of the production process, various taxes are imposed on various goods and services. Value Added Tax (VAT) was one of the most prominent types of taxes on commodities. The cascading effect of VAT, which was charged on every step of the value chain of goods, had a negative influence on inflation. GST was implemented in 2017 by the Indian government to meet its “One Nation, One Tax” goal. However, despite the fact that most goods and services are now subject to GST, VAT remains in place for those that are not.

What is VAT?

Customers who purchase items are subject to Value Added Tax (VAT), whereas those who purchase services are not. As a result of the way VAT operates, the final consumer is forced to pay substantial amounts of money in taxes. This was a major factor in the shift from VAT to the GST. To comply with the VAT system, retailers must deduct taxes from their sales, hold onto taxes from their purchases, and then remit the remainder to the relevant tax authorities. Due to the fact that taxes are ultimately borne by consumers, this type of tax is referred to as a “consumption tax”.

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How Is VAT Calculated?

Let’s have a look at how VAT is computed now that you know its entire form and what it is. In order to grasp how VAT works, you must first understand the difference between input and output taxes.

  • Input Tax

It is the tax dealers pay on the goods they buy, which is known as the input tax. They will have to pay VAT on most of their purchases, but in most situations, they will be able to receive VAT back. Equipment and machinery, as well as raw materials, are examples of capital goods that are subject to input tax.

  • Output Tax

Consumers pay the output tax when they buy a taxable product from a retailer. A VAT-registered dealer can be a corporation, a partnership, or a person. In order for a business to register for VAT, it must have annual sales of at least Rs 5 lakh. All taxable sales are subject to VAT after they have registered.

Computation of VAT

While it is now possible to use a VAT calculator online, it is important to understand what is going on behind the numbers. VAT is calculated using a simple formula.

VAT= Output Tax – Input Tax

Suppose a retailer purchases products for Rs 100 and needs to fork over Rs 10 in VAT (Value Added Tax). The dealer then sells the goods to you for Rs 150, and he/she charges you 10% VAT (Rs 15). There is a 15 percent production tax and a 10 percent input tax here. As a result, the dealer will only have to pay the tax authorities Rs 5 because he/she paid Rs 10 VAT on the products he/she purchased.

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VAT E-Filing

Both online and offline filing options are available for VAT returns. The internet technique is preferred by most dealers since it is fast and convenient. As part of the registration process for VAT, you are given a unique User ID and Password. Using this, you can access the VAT E-Filing system and make VAT payments online. Every state has its own e-filing portal because VAT is a state tax. All states, however, use the same VAT filing procedure.