Full Form of VAT – Value Added Tax | 2 Best VAT Calculation Methods

The full form of VAT is “Value Added Tax”. VAT is one of the several types of taxes levied by the respective governments of a country for funding various public expenditures. Value-added tax abbreviated as VAT also known as Goods and services tax is levied incrementally i.e. it is charged at each stage of production, distribution, or sale of goods or services to a customer be it an individual or a businesses. For example, a consumer of Coffee pays VAT for procurement, distribution, and processing of coffee. It is a destination-based taxation system meaning it changes depending upon the location of the consumer. More than 160 countries that are permanent members of the United Nations employ VAT as one of the taxes. Know about full form of VAT more here.

Implementation of VAT was first done during World War I years by Germany and France in the form of general consumption taxes. The modern version of VAT was designed independently by Dr.Wilhelm Von Siemens, a German industrialist in the early 20th Century. Following this many European countries Like France and Netherlands implemented VAT in the subsequent years. The beliefs and purpose behind the implementation of VAT were different in countries, for example, Europeans used VAT to reduce sales tax while Americans found VAT to be a better version of corporate taxes. Know more about the full form of VAT.

We have discussed the full form of VAT and a brief history of VAT. Now we are going to know about some of the methods by which VAT is computed. There are 2 methods to compute VAT.

In this method sales, and transactions are taxed and businesses receive credit for VAT paid on input material and services.

VAT payable= Tax on sales Bill – Tax on purchase bill

In this method, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference obtained.

Taxable Turnover= Sales excluding taxes-purchase excluding taxes

 VAT Payable = Taxable turnover* tax rate

VAT and sales taxes raise nearly the same amount of revenue, the difference lies in at what point the money is paid and by whom. Here is an example that predicts a VAT of 10%:

A farmer sells wheat to a bakery for 30 paise. The bakery pays 33 paise; the extra 3 paisa represents the VAT, which the farmer pays to the government.

The bakery uses the wheat to make bread and sells a loaf to a local supermarket for 70 paise. The mall pays 77 paise, including a 7 paisa VAT. The bakery pays 4 paise to the government, the other 3paise were paid by the farmer.

Finally, the mall sells the loaf of bread to a customer for Rs.1. Of the Rs.1.10 paid by the consumer, or the base price plus the VAT, the supermarket sends 3paise to the government.

With a traditional 10% sales tax, the government receives 10 paise on an Rs.1 sale. The VAT differs in that it is paid at different stages along the supply chain; the farmer pays 3 paise, the baker pays 4 paise, and the supermarket pays 3 paise.  Know more about full form of VAT.

Hereafter the VAT calculation method and full form of VAT we are covering the advantage of VAT.

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