3.2 Value added tax computation

Value Added Tax (VAT) computation involves calculating the VAT liability or credit for a specific reporting period based on the VAT collected and paid by a taxable person. VAT is a consumption tax that is typically levied on the value added at each stage of the supply chain. Here’s an overview of how VAT computation is generally performed:

1. Determine VAT Rates: Identify the applicable VAT rates for different types of supplies and transactions. Different goods and services may be subject to different VAT rates or exemptions.

2. Identify Taxable Supplies (Output Tax): Calculate the total value of taxable supplies made by the taxable person during the reporting period. This includes sales, services, and other taxable transactions subject to VAT.

3. Calculate Output Tax: Multiply the total value of taxable supplies by the appropriate VAT rate(s) to calculate the total output tax liability. This is the VAT collected from customers on behalf of the tax authority.

4. Determine Eligible Input Tax: Identify the VAT paid by the taxable person on business expenses (input tax) during the reporting period. Input tax can be claimed for eligible expenses, such as purchases of goods and services used for business purposes.

5. Calculate Net VAT: Subtract the total input tax from the total output tax to determine the net VAT liability or credit for the reporting period. If input tax exceeds output tax, a credit (refund) may be available. If output tax exceeds input tax, a payment may be due to the tax authority.

6. Adjustments and Corrections: Make adjustments for any corrections or amendments that need to be made to the VAT computation, such as errors in invoices, returns, or adjustments for bad debts.

7. Filing VAT Returns: Complete the VAT return form provided by the tax authority, which includes details of the VAT computation, output tax, input tax, and net VAT. Submit the VAT return within the specified deadline.

8. Payment or Refund: If the net VAT is a positive amount (output tax exceeds input tax), pay the VAT liability to the tax authority within the specified deadline. If the net VAT is negative (input tax exceeds output tax), the taxable person may be eligible for a refund.