Value Added Tax (VAT)

VAT is a significant tax for the government, businesses, and citizens. It is a tax that everyone should know and understand.

VAT Calculator

This calculator allows you to Calculate the Net Amount from the Gross Amount, Calculate the Gross Amount from the Net Amount, Calculate the VAT Rate.
Simply fill in ONLY TWO fields in this form to find the other values. If you fill in more than two fields, only the first two will be considered.

What is VAT?

Previously, businesses used to manufacture and sell services and goods. Citizens would buy them and live well. They spent money, consumed, and prices were low. It was happiness. This situation does not please the government. So, the government asks businesses to increase their prices by a percentage, and the amount of this increase must be transferred to the treasury. Therefore, the VAT is an indirect tax paid by the citizen when consuming something. It is considered indirect because it is paid through others.

The company will sell its product for 168. It will keep 140 for itself. And transfer the 28 to the government. In conclusion, we find that VAT relates to 3 parties:
A loser: The citizen since he has to pay more for his product as he bears the VAT.
Neither loser nor winner: The company because it keeps its margin intact (40). It simply plays the role of an intermediary by transferring the amount received from the citizen to the government.
A winner: The government, which will receive money for every good or service purchased within the national territory.
This tax, which hits consumption, is among the main sources of government revenue and the main source of the citizen's unhappiness.

VAT Calculation

VAT Rate

VAT is calculated at a rate set by law. These rates generally increase from one year to another. In France, the normal VAT rate is 20%. The other rates are 10%, 5.5%, and 2.1%.
Even a rich country like Saudi Arabia started applying VAT at a rate of 5% in 2018 and then tripled the rate to become 15% in 2020. The crisis is everywhere: wars, oil, COVID-19...

VAT Calculation

It is necessary to distinguish between:
Net price = Net Amount = Price without VAT = Net Price
Gross Price = Price Including All Taxes = Price with VAT = Price Including VAT
VAT is always calculated on the net price. The VAT formula is as follows:
VAT = Net Price * VAT Rate
Gross Price = Net Price + VAT
Example: Let's take the purchase of a chocolate tablet for 5 dollars excluding VAT with a 20% VAT.
VAT = 5 * 0.02 = 1 dollar
Gross Price = 5 + 1 = 6$ . So, if you eat chocolate, know that you have given some money to the government.

We can calculate the Gross Price from the Net Price directly using the formula:
Gross Price = Net Price * (1 + VAT Rate)
Example: Gross Price = 5 * (1 + 0.2) = 6
We can calculate the Net Price from the Gross Price directly using the formula:
Net Price = Gross Price / (1 + VAT Rate)
Example: Net Price = 6 / (1 + 0.2) = 5 dollars

The 1% Method

Let's consider the case of a Net Price of 3000 and a VAT rate of 20%. The following table illustrates the situation:

It is noticeable that each amount represents a percentage of the Net Price. The steps to follow when we have an unknown are as follows:
- Divide the known amount by its percentage to find 1%
- Multiply the amount found by the percentage of the unknown amount
Example 1: Consider the following situation:

Here, the known amount is the Gross Price . It represents 120%. We divide it by 120 to find the amount of 1%, which is 6000/120 = 50. Then, we can find the Net Price by multiplying this 50 by 100 (which gives 5000). Additionally, we can directly find the VAT by multiplying this 50 by 20 (which gives 1000).

Example 2: Consider the following situation:

Here, the known amount is the amount of VAT. It represents 7%. We divide it by 7 to find the amount of 1%, which is 210/7 = 30. Then, we can find the Net Price by multiplying this 30 by 100 (which gives 3000). Additionally, we can directly find the Gross Price by multiplying this 30 by 107 (which gives 3210).

Companies and VAT

There are two types of businesses: those subject to VAT and those not subject. We will only talk about businesses subject to VAT: These businesses do not bear the VAT. They act as intermediaries or collectors.
Let's take an example: Company Alpha manufactures a product that costs 800 euros. It will sell it for 1000 euros. When it sells this product, it invoices its customer for the TTC amount = HT + VAT = 1000 +190 = 1190
So the customer will pay 1190 and the company receives 1190. Then the company keeps 1000 D for itself and pays (transfers) the 190 D to the State. Thus, this company has acted as a collector on behalf of the State.
In what has preceded, we have talked about the sale. Now we will talk a little about the purchase. When a company buys a good or a material, does it pay VAT? There are two systems in the world.

System 1: Companies that do not pay VAT on purchase

These companies do not pay VAT at the time of purchase. So periodically they transfer the VAT received from customers to the State.

System 2:  Companies that pay VAT on purchase

In fact, at the time of purchase, the company pays the TTC price, so it pays the VAT, but after a few days it will recover this amount from the State. So it's as if it hasn't paid anything.
Let's take the example of our company Alpha which has purchased raw materials. The supplier sends it an invoice with a TTC amount = HT + VAT = 400 + 76 = 476 euros. So Alpha will pay 476 D.
A few days later, the State will pay Alpha 76  . In the end, we find that Alpha has paid 476 and received 76 so it has actually paid only 400 euros which is the HT amount
Conclusion When Alpha receives the VAT from its customer, it must pay it to the State.
When Alpha pays the VAT , it recovers it from the State.
So Alpha acts as an intermediary and does not bear the VAT. That is why the VAT paid by the company when purchasing is not an expense and the VAT received when selling is not income.

5. VAT Settlement

Each month (or each period according to the legislation), the company must sum up all the VAT collected and the sum of all the deductible VAT (recoverable). Then calculate the difference. Two cases are possible:
Normal case: VAT collected > Deductible VAT. In this case, the difference constitutes a VAT payable (to be paid). This amount will be paid to the tax authorities later.
I will take a monthly VAT payment here. Example for March: VAT collected: 1200; Deductible VAT: 900; VAT payable = 1200-900 = 300 (to be paid in April)
Exceptional case: VAT collected less than deductible VAT. In this case, the difference constitutes a VAT carryforward (VAT credit). This amount will be carried forward to the following periods or paid according to the country's legislation.
Example for the month of April: VAT collected: 1200; Deductible VAT: 1300; VAT carryforward = 1300-1200 = 100 (to be included in April)
VAT payable formula:
VAT = VAT collected - Deductible VAT - carryforward from the previous month
If we find a positive amount then it is a VAT payable otherwise it is a VAT carryforward.