Value-Added Tax (VAT) is an indirect tax on most goods and services in the economy. Its primary purpose is to generate revenue for the government by adding a tax to the value that was added by an entity. Some governments refer to this tax as “sales tax”. Most goods and services are subjected to VAT, with some exemptions, which have a tax rate of zero. The average John Doe does not need to understand the detailed rules and regulations regarding VAT, but only the basics. Part of the basics is how to calculate VAT. It this article I will explain the most basic calculations of VAT. The VAT rate will be 15% in all calculations.
When you have a business, for example, that sells dried fruit, you will have to register at the South African Revenue Service (SARS) to be a VAT vendor. Once you are a registered VAT vendor, you should charge 15% VAT on all the products you sell, and pay that VAT amount to SARS. The plus side is that you are allowed to deduct the VAT you have paid on your inputs.
Let’s
say that, for example, your input cost for one kilogram's dried fruit is R115
(VAT included). To calculate the VAT on
this amount, you will need to think about it from the other end: what amount
was used to add 15%, to get to R115? The
calculation is as follow:
This calculation can be simplified as follow:
In this example, the VAT amount equals:
The next step would be to add the business’ costs and profit margin to the purchase price (excluding VAT). This is because the VAT that you have paid on inputs can be deducted from the VAT you are about to pay to SARS in your selling price. Let’s assume the fixed cost per kilogram dried fruit is R15, and variable costs is R10. The profit margin for this business is 25%. To calculate the cost price of one kilograms' dried fruit, would then be:
We can now apply the profit margin and sales VAT to the unit cost per kilogram:
One kilogram of dried fruit would be sold at R179.69. Now, we need to calculate the VAT we should pay to SARS for the value that we have added to the product. We can use equation 2 for this calculation:
The amount you
owe SARS is R23.44 and the amount (your input VAT) you can deduct from the output
VAT amount, was R15. The net effect is
that you owe SARS R23.44 – R15.00, which equals R8.44. This is the tax on the value that you have
added to one kilogram's dried fruit.
The above
discussion is very basic and can get very complex in large enterprises with
many products and services. Luckily, we have
accounting software to keep track of all VAT amounts with all inputs and outputs. The conclusion is that you need to take VAT
out of the calculation of cost and profit margin, then add VAT to the selling
price of your product.
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