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Calculate complex VAT using the VAT Calculator

Prior to the Goods and Service Tax (GST), India used a Value Added Tax system (VAT) to calculate the taxes on products. This tax system was way more complex and required a VAT calculator to make the calculations simple.

Even today, if you want to calculate the tax levied on petrol or diesel, you will need to use a VAT calculator. In this article, we will take a closer look at how the VAT functions.

Value-added tax (VAT) is a consumption tax on goods and services that is assessed at each stage of the supply chain where value is added, from initial production to the point of sale. The cost of the product minus any costs of components that have already been taxed at a previous stage determines how much VAT the user must pay. It is a globally accepted tax structure.

This is how a value-added tax works.

Value taxes, like sales taxes, are levied on consumption rather than on an individual's or business's income. This tax is collected at multiple stages while you are purchasing a good or service off the ground and into the market for sale. When a good or service is produced, VAT is calculated and gathered at each stage where the item receives some kind of value addition, such as during production, distribution, or the product's sale. Value tax, also known as the gross margin, can be defined as the discrepancy between the cost of goods and the sale price.

VAT is based on the item's price at the time that more value has been added. Because of the way VAT is set up, the amount owed is determined by the product's or service's gross margin and excludes any sums that may have already been subject to tax at a previous stage.

An example of how VAT works:

Consider the following example to better understand what this means. If you’re traveling to a nation where VAT is levied on products, and you want to purchase a T-Shirt. Let us assume that the VAT rate in the nation is 20 percent, then there are various stages at which taxation occurs:

A 20-cent VAT tax must be paid by the t-shirt manufacturer for the raw material that they buy for one euro to make the shirt. Thus, their total expenditure to date is 1.20 euros.

The manufacturer then sells the t-shirts to a shop for 5 euros plus the value tax of 1 euro (20 percent VAT tax), thus making the cost of the product to be 6 euros. Since the manufacturer already paid 20 cents in VAT for the raw materials, it only pays the government 80 cents of the 1 euro.

Finally, when a customer purchases the t-shirt from the shop, then he/she pays 12 euros for it, which is the 10 euros cost plus 20 percent VAT. Since 20 cents were already paid for raw materials and 80 cents were spent on buying the t-shirt in bulk, the shop will be responsible for paying a VAT tax of 1 euro.

As you can see, the value tax process is more involved and calls for various entities to report and pay taxes at various points.

A brief history of VAT

Dr. Wilhelm von Siemens, a German-born industrialist, first proposed the VAT's fundamental idea. On April 10, 1954, Maurice Laure, the Joint Director of the France Tax Authority's Direction Generale des Impots, adopted a proposal that had been made in 1918. Out of 193 countries, 160 have a VAT system in place, according to calculations based on data from 2014. All of the Organisation for Economic Co-operation and Development (OECD) members are included in this figure, with the exception of the United States.

VAT is charged on both domestically produced goods and services as well as those that are imported, and anyone whose company generates yearly revenue of more than 5 lakhs must register for VAT.

VAT calculation formula:

A simple VAT calculation formula is by deducting the input tax from the output tax to determine VAT. The seller of goods and services is responsible for paying input tax on the purchases of manufacturing-related raw materials. The seller receives output tax at the time of sale of goods and services. Therefore, it is clear that: VAT = OUTPUT TAX – INPUT TAX

This equation can be used for a VAT calculator. For a better understanding of how the VAT is calculated, let's use an example. Let's suppose Rohan is the owner of a hotel. He purchased raw materials worth 1,00,000 rupees, and raw materials were subject to a 10% input tax. As a result, the total input tax he paid is 10% of 100,000, or Rs. 10,000.

After selling the food produced with those ingredients, he was able to make a total of Rs 2,00,000. If we assume that the total output tax is 10% of earnings, the total output tax equals 10% of ₹ 2,00,000, or ₹ 20,000, in this case. Therefore, by subtracting the input tax from the output tax, we can quickly determine the total VAT owed by Raju. Therefore, VAT is equals to 20,000 – 10,000, i.e; 10,000.

Use an online VAT calculator:

With a few clicks, you can add, subtract, and calculate VAT for your invoices using our online VAT calculator. If you are aware of the price before VAT, then

Step 1: Enter the cost excluding VAT.

Step 2: Enter the amount on which VAT is levied.

Step 3: To check the outcome, click Calculate.

In addition, if you know the price with VAT, then

Step 1: Input the price inclusive of VAT.

Step 2: Enter the amount on which VAT is levied.

Step 3: To check the outcome, click Calculate.

You will now get an idea about the price before VAT and the amount of VAT being charged.

To calculate GST use our Gst Calculator by Clicking on Gst Calculator