It is critical to learn some basic financial terms in order to succeed in the financial sector. Understanding these concepts will undoubtedly give you an advantage. The Value Added Tax (VAT), also called as the Good Service Tax (GST) in some countries, is one of these notions.
If you’ve come to learn about VAT (Value Added Tax), you’ve come to the right place. We’ll go over all you need to know about Value Added Tax in this article. This section covers the definition, how to calculate it, and everything else you need to know about the subject.
What is VAT (Value Added Tax)?
The Value Added Tax (VAT), sometimes called as the Goods and Services Tax (GST) in some countries like Canada, is a consumption tax. It’s mostly used on items at every stage of the manufacturing process where value is added. This includes labour, raw materials, and the sale of finished goods. For example, if a 20 percent VAT is applied to a N100, 000 item, the final consumer will pay N120, 000 for the item.
What is the formula for calculating Value Added Tax (VAT)?
It’s simple to figure out how much VAT you’ll have to pay. You don’t have to be an expert in maths to understand it. Essentially, you must take the VAT amount at the most recent stage of manufacturing to compute the amount of VAT you must pay at each stage. After that, you deduct the VAT you’ve already paid. This eliminates the problem of double taxation.
Consider the following scenario with a 10% VAT assessed at each stage of manufacturing for a better understanding.
A car manufacturing business pays N550, 000 for raw materials, which includes a 10% VAT. The assembler buys the pieces from them when they finish making them for N1.1 million, which includes a tax of N100, 000. The maker is paid N1.1 million, of which he pays the government N50, 000.
As you can see, the manufacturer did not pay the government the entire N100, 000 in VAT. This is due to the fact that he has already paid the raw material seller’s VAT. As a result, he would keep the remainder and pay the government N50, 000. (between N100,000 and N50,000) to the government.
Similarly, the VAT paid at each stage of production may always be calculated by subtracting the VAT already charged from the VAT at the final stage of production.
VAT compliance in Nigeria
Every VAT invoice must include the following information:
- The supplier’s name, address, and tax identification number.
- Name, address, and tax identification number of the customer.
- The VAT number of the supplier is then entered.
- The delivery date
- VAT unique number
- A summary of the goods or services provided.
- The amount charged, the invoice’s gross amount, and the VAT rate
Credit notes, on the other hand, are not required by the VAT Act, however they are accepted.
Furthermore, electronic invoicing are not required by the tax authorities. There’s no option for a simplified invoice, either. A fine of 50% of the taxable cost of the supply may be imposed if VAT invoices are not issued.
Is Value Added Tax (VAT) the same as Sales Tax?
No. Although they are comparable, Sales Tax and Value Added Tax are not interchangeable. The primary distinction is that sales taxes are only available at the end of the buying process. On the other hand, VAT is always available at every stage of production. Value Added Tax and Rate
Furthermore, VAT is preferable to sales taxes. This is because VAT permits you to apply tax amounts to different phases of the manufacturing process. This is mostly determined by the amount of value added at each stage. And, because you only tax individuals, determining the value-added at each level of production is very impossible. In reality, this makes tracking and allocating sales tax to certain stages of production extremely difficult. Value Added Tax and Rate.
What is Nigeria’s current VAT rate?
Nigeria’s VAT rate was formerly set at 5%, but it would not be increased to 7.5 percent until January 13, 2020. This increase is in accordance with the president’s signature on the finance bill. So, the current VAT rate is 7.5%.
Summary
Value Added Tax and Rate is an indirect tax on goods and services that is calculated as a percentage of the value added. It serves as a source of revenue for the government and has a favourable impact on a country’s economic growth and development.
Source: Nyscinfo