Sales taxes generally take one of two forms: –
A unit tax is a percentage of the value of each unit good purchase( a gallon of gas or a quart of milk)
An ad-valorem tax is the percentage of the value of the entire purchase- real estate or personal
property.
Input Tax
It is a tax incurred or incurable when a registered business or individual purchases goods or serves from
another registered business owner.
Output Tax It is a tax charged or chargeable under the VAT Act by a registered business owner when
they sell the goods and services
Example when a farmer sells egg to a grocer the grocer pays input tax to the farmer. When the grocer
sells those eggs to his customers he charges an output tax.
There are three main methods of computing VAT
Addition method: This method adds the factor including profits . This then is the total value addition to
the product or service. The tax rate is applied to this. It is used for income variance. The disadvantage
here is that it does not require matching of invoices. Unless this is done, detecting tax evasion becomes
difficult difficult as taxes are calculated by period not by invoice
Invoice method of computing VAT : Most common and popular method. Tax is applied at every stage
of sales of the sales cycle and tax paid at the earlier stage is allowed as set-off.
The differential tax is paid at every stage
Within each stage, the tax is to be charged separately in the Invoice.
Also known as voucher method
Cost subtraction:
A subtraction-method VAT also business transfer tax, businesses pays the tax difference between the
value of sales and purchase from other businesses. In this it is similar to Invoice method . Japan uses a
subtraction-method VAT, but it contains all the invoice requirements so in the end , it is similar to
Invoice method.
Net Income
Non taxable income
Taxable expenses not included in net profit
Taxable income
Tax rate
Taxable income
60,000
20,000
5000
45,000 (60,000-20,000+5000)
23%
10,350 (23%x 45,000)
(subtract non taxable income and add taxable expenses not added to profit which gives taxable income,
apply the taxation rate to that amount to get taxableincome)