What is VAT?
Value Added Tax, commonly known as VAT, is a consumption tax placed on goods and services. The concept of VAT concerns the "added value," which explains the sale price of a product after deducting the cost of materials and other taxable inputs. Essentially, VAT applies to every stage of production of goods and services (thus it's called a multi-stage tax) and is calculated based on the "added value" only. This method means that each participant in the production chain pays VAT only for the "added value" they create. As a result, the final consumer who does not produce any "added value" ultimately bears the tax burden.
How to Use a VAT Calculator
Calculating VAT is a straightforward process. Here's a simplified step-by-step guide on how to calculate VAT:
Determine the net price: This is the VAT exclusive price. For instance, let's assume a net price of €50.
Figure out the VAT rate: Now, you should be aware of the VAT rate applied. In our example, we'll consider the VAT rate as 23%. If expressed in percentages, the value must be divided by 100. Thus, it becomes 23 / 100 = 0.23.
Calculate the VAT amount: This is achieved by multiplying the net amount by the VAT rate. Taking our net price of €50 and VAT rate of 0.23, it would imply €50 × 0.23 = €11.50 for VAT.
Determine the gross price: Add the VAT amount from Step 3 to the VAT-exclusive price. This will give you the VAT inclusive value. Going on with our example, we get €50 + €11.50 = €61.50 for the total amount including VAT.
An Actual Example to Demonstrate the Calculator
Let us consider an example to make these ideas more concrete. Suppose a lumberjack cuts trees (without cost) and sells the wood (enough for one barrel) to a sawmill owner for $100. The sawmill owner cuts the wood into oak staves and sells it to the cooper for $150. The cooper then makes a barrel that he can sell for $300 to the retailer who eventually sells it to the customer for $350.
With a VAT of 10%, consider a delivery chain that includes four stages:
The lumberjack sells his logs for $100, the "added value" at this stage being $100. The VAT is therefore $10 (10% of $100).
The sawmill owner sells staves for $150, which makes the "value added" here $50 (the sales price of $150 minus the purchase cost of $100). The VAT will therefore be $5 (10% of $50).
The cooper sells the barrel for $300, making the "value added" $150 (the sales price of $300 minus the purchase cost of $150). The VAT will be $15 (10% of $150).
The retailer sells the barrel to the customer for $350, so the "value added" by the retailer is $50 (the sales price of $350 minus the purchase cost of $300). The VAT will therefore be $5 (10% of $50).
Thereby, the total VAT paid is $35 or 10% of the sum of values added at each stage. It would also be the same amount if a sales tax were applied, except that sales tax is assessed only at the point of sale to the customer.