How Is VAT Calculated?

 How Is VAT Calculated?

Value Added Tax (VAT) is a consumption tax applied to goods and services at each stage of the supply chain. It is calculated as a percentage of the net price or the gross price, depending on the requirement.

Basic VAT Calculation Formula:
VAT Amount = (Net Price × VAT Rate)
Gross Price (Including VAT) = Net Price + VAT Amount

Example 1: Adding VAT to a Price
A product costs $1,000, and the VAT rate is 15%.
VAT Amount = $1,000 × 15% = $150.
Total Price (Including VAT) = $1,000 + $150 = $1,150

Example 2: Extracting VAT from a Price (Reverse Calculation)
If a product’s total price (including VAT) is $1,150, and the VAT rate is 15%, we find the VAT amount as follows:
Net Price = Total Price ÷ (100 + VAT Rate)*100
Net Price = $1,150 ÷ (100 + 15)*100 = $1,000
VAT Amount = $1,150 - $1,000 = $150

VAT in Business Accounting
Input VAT: VAT paid on business purchases (deductible).
Output VAT: VAT collected from customers.

VAT Payable: Output VAT - Input VAT (Remitted to the tax authority).

Why Is VAT Important?
✔️ Ensures tax compliance for businesses.
✔️ Generates government revenue.
✔️ Affects pricing and financial planning.