What is VAT or Value Added Tax


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SUMMARY

This article describes VAT or Value Added Tax.

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Value Added Tax or VAT is the tax is levied on the value that is added to the goods or services in question at each stage in the production and distribution process. This is achieved by levying tax at each point en route as ownership passes from one person to another. The tax liability at each stage is based on the difference between the value of the outputs and the value of the inputs, hence `added value`.

There are fourteen different countries in Europe that assess VAT. The conditions for registration to the VAT system vary from country to country. For each country VAT has exceptions, exemptions, variable rates, special rules on exports and imports, special rules if you are within the European Union (EU) or not

The following example will give you an overview of how VAT functions from the retailer`s point of view.

A purchase transaction by the retailer contains VAT or the input tax which is DM16. His sales transaction also includes VAT or the output tax which is DM24. The company has to calculate the amount due to the taxing authority (output tax minus input tax) for a specific financial period (monthly, quarterly or yearly). In this example the retailer has to pay DM8. If the amount of the input tax exceeds the amount of the output tax, the company will receive this surplus back from the taxing authority.



This article was TechKnowledge Document ID: 8068

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