VAT — or Value Added Tax — was introduced in India in 2005.
This is a form of indirect tax ultimately paid by the retail customer, but collected and paid to the government by producers and distributors. As the name implies, the tax is collected at each stage of value addition to the product or service.
The VAT Payable At Each Stage
Let’s say a pencil manufacturer buys wood to make pencils. He pays the supplier the price of the wood, plus the VAT on the price. If we assume that VAT is 10%,
- Price of wood purchased = Rs. 10,000
- VAT paid = Rs. 1000
- Total cost = Rs. 11000
Now, the pencil maker can recover the tax he paid on the purchase. He, in turn, adds VAT to the price at which he sells the pencils to a distributor. So, if he uses the wood to make one lot of pencils that he sells for Rs. 30,000,
10% of Rs, 30,000 = Rs. 3000
This is known as the output tax (the tax he paid while purchasing the raw material is known as the input tax). He can reclaim the tax he paid, and only needs to pay the remaining amount to the government.
So, VAT payable by the pencil manufacturer is
- VAT Payable = Output Tax – Input Tax
- VAT Payable = 3000 – 1000
- VAT Payable = Rs. 2000
This goes on up the production and distribution chain, till it reaches the retail stage. There, the final VAT is paid by the consumer who cannot reclaim the tax paid from anyone else. If you consider it from this angle, you could call it a form of consumption tax.
The Calculation Formula For VAT On Goods Or Services
You can find online VAT Calculator tools to automate these calculations. Still, for those times you need to calculate the VAT yourself, the formula is simple.
VAT = Cost Price x VAT Rate/100
For easy calculation, convert the VAT percentage into a decimal.
- If the VAT is 15%, then converting it to a decimal gives 0.15
- So now, VAT = Cost Price x 0.15
- If Cost of product is Rs.1000
- VAT = 1000 x 15
- VAT = 150
Net Cost of Product after VAT
- Net Cost = 1000 + 150
- Net Cost = Rs. 1,150
If you know the VAT rate and the original cost, you can directly calculate the net cost using this formula
- Net Cost = Cost Price x (1 + (VAT Rate/100))
- Net Cost = 1000 x (1 + (15/100))
- Net Cost = 1000 x 1.15
- Net Cost = Rs. 1,150
If you want to calculate the original cost in a bill amount that includes VAT, use this formula
Net Price(VAT Inclusive)/(1 + VAT Percentage)
- Cost without VAT = 1150/(1 + 0.15)
- Cost without VAT = 1150/1.15
- Cost without VAT = Rs. 1000
So, even without a VAT Calculator, you can easily find the VAT, Net Price, and Cost without VAT using the above simple formulas. Next time you are in a restaurant and you get the bill, try it.
VAT Rates in India
How to calculate VAT