VAT is a consumption based tax with the provision to allow Input tax credit -Tax paid on purchases to be utilized or set-off against the VAT liability Tax collected on Sale. If there is any
Let us understand with an example
|Cost||VAT 5%||Total||Selling Price||VAT 5%||Total||Input VAT||Output VAT||VAT Payable|
|Output VAT – Input VAT|
|A-One Supplies||Raw Material Supplier||—||—||—||1,000||50||1,050||0||50||50|
|Best Bicycles Ltd||Manufacturer||1,000||50||1,050||1500||75||1,575||50||75||25|
|Top Distributor Ltd||Distributor||1500||75||1,575||2,200||110||2,310||75||110||35|
In the above example,
Now, if you closely observe, the total tax paid by all parties (A-One Supplies 100 + Best Bicycles Ltd 50 + Top Distributor Ltd 70 + Favourite Bicycles Store 30) is 250 which is exactly the same amount of VAT paid by the
With the final approval and signing of GCC united VAT Agreement by the all the member countries, the taxation system VAT is all set to be implemented in
While these countries are preparing for implementation VAT, what does it implies to the businesses, for whom the subject Indirect Taxation is new although it exists in
Value Added Tax (VAT) is the tax levied at every level of value addition done to the product across the supply chain. It is levied at every point of sale from manufacturer till it is sold to an end consumer. This achieved by allowing tax paid on purchase is known ‘Input Tax Credit’ or also known as ‘input VAT’ to be adjusted with the VAT collected on sales knows as ‘Output VAT’. Ultimately, the entire tax is paid by the consumer.
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