VAT is value added tax. Understanding of VAT calculation is very important for any business start-ups in India. It is somewhat complex because of various level of buying and selling transaction involved on a product. . There is confusion as how is VAT calculated on product or services and who is liable to pay VAT. Here i am explaining about VAT and formulas to calculate VAT tax with example. If you search online you will get many vat calculator on internet, however after reading this article you will understand calculation of vat and can calculate vat tax yourself.
Value added Tax (VAT)
VAT is tax imposed on the value added to any product or services. It is paid by the original producer when the goods or services are transferred to their ultimate users. Therefore it is a multi-stage tax levied on the value added at each stage of production of goods or services. It reduces the repetition of taxes on same products or services. The producer has to pay tax on only his contribution of value added. If there is no value added then there will be no VAT levied.
Any person who makes an annual turnover of more than Rs.5 Lakhs by supplying goods or services is supposed to register for VAT payment.
VAT calculation formula
VAT=Output Tax – Input Tax
Output Tax is Amount received by a seller as a percentage of the selling price of the final product or Goods Sold.
Input Tax is Amount paid by a buyer as a % of price for product or goods purchased.
Suppose Madan is a Steel manufacturer who bought scrap steel for Rs.100000 and paid an input tax of 12.5% = Rs.12500. So he paid input tax of Rs.12500 to the scrap seller.
Madan made steel sheets by melting scrap steels in furnace and sold these sheets for Rs.250000. On this he collected an output tax of 12.5% on the selling price = 10% of 250000 = Rs.31250
So, final VAT payable comes out to be Output Tax – Input Tax = Rs. 31250-Rs. 12500 = Rs.18750