Value Added Tax

Value added tax in short known as VAT.

We are already acquainted about the tax because a new method of realising tax on purchasing or selling of goods. In the earlier form of sales tax, the tax used to be realized by the government at a single point.

The manufacturer or importer of goods (wholesaler or stockist) was liable to pay sales tax to the government. Value added tax is the tax that is realized by the government at many points in the supply chain, right from the manufacturer to the retailer. Only the value added to the commodity at each stage is subjected to sales tax. The final incidence of sales tax remains with the consumer.

It is a tax on the value added at each transfer of goods, from the original manufacturer to the retailer.

Suppose for example, the rate of tax is 10% and a trader purchases an article for $ 800, the tax he pays = 10% of $ 800 = $ 80

Now, if he sells the same article for $ 1150

The tax he recovers (gets) = 10% of 1150 = $ 115

Vat = Tax recovered on the sale - tax he paid on the purchase

      = $ 115 - $ 80 = $ 35


Again, assuming that, a retailer purchases an article for $100 from the wholesaler. The wholesaler charges a sales tax at the rate of 10% on it as prescribed by the government for that variety of articles. Thus, the retailer pays $100 + 10% of $100, i.e., $100 + $10 (equals $110) to the wholesaler to have the article. The wholesaler gets $100 and he pays $10 to the government as sales tax. The retailer sells the article for $120 to the consumer and charges a sales tax of 10% on it as prescribed by the government. Thus, the consumer pays $120 + 10% of $120, i.e., $120 + $12 (equal $132) to the retailer to get the article. The retailer gets $120 + $10, i.e., $130 after paying $12 - $10, i.e., $2 as sales tax to the government. The retailer pays 10% of (sales price – cost price), i.e., ($120 - $100) to the government. Thus the retailer pays the tax on the added value or the raised value of the article. So, the value added tax for the retailer in this case $2.

The above example is summarized below to understand it better.

For the retailer we have;

Purchase price =$100

Tax paid on purchase = $10, (this tax is known as input tax)

Sale price = $120

Tax payable on sale price = $12, (this tax is known as output tax)

Input tax credit = $10

So, value added tax payable by the retailer = output tax – input tax

                                                               = $12 - $10

                                                               = $2

Note: VAT (value added tax) = output tax - input tax

● Sales Tax and Value Added Tax



10th Grade Math

From Value Added Tax to HOME PAGE




Didn't find what you were looking for? Or want to know more information about Math Only Math. Use this Google Search to find what you need.



New! Comments

Have your say about what you just read! Leave me a comment in the box below. Ask a Question or Answer a Question.

Share this page: What’s this?

Recent Articles

  1. Successor and Predecessor | Successor of a Whole Number | Predecessor

    May 24, 24 06:42 PM

    Successor and Predecessor of a Whole Number
    The number that comes just before a number is called the predecessor. So, the predecessor of a given number is 1 less than the given number. Successor of a given number is 1 more than the given number…

    Read More

  2. Counting Natural Numbers | Definition of Natural Numbers | Counting

    May 24, 24 06:23 PM

    Natural numbers are all the numbers from 1 onwards, i.e., 1, 2, 3, 4, 5, …... and are used for counting. We know since our childhood we are using numbers 1, 2, 3, 4, 5, 6, ………..

    Read More

  3. Whole Numbers | Definition of Whole Numbers | Smallest Whole Number

    May 24, 24 06:22 PM

    The whole numbers are the counting numbers including 0. We have seen that the numbers 1, 2, 3, 4, 5, 6……. etc. are natural numbers. These natural numbers along with the number zero

    Read More

  4. Math Questions Answers | Solved Math Questions and Answers | Free Math

    May 24, 24 05:37 PM

    Math Questions Answers
    In math questions answers each questions are solved with explanation. The questions are based from different topics. Care has been taken to solve the questions in such a way that students

    Read More

  5. Estimating Sum and Difference | Reasonable Estimate | Procedure | Math

    May 24, 24 05:09 PM

    Estimating Sum or Difference
    The procedure of estimating sum and difference are in the following examples. Example 1: Estimate the sum 5290 + 17986 by estimating the numbers to their nearest (i) hundreds (ii) thousands.

    Read More