General principles of VAT

V1.101 Taxation of value added

Value added tax is a tax on the value which traders add to their purchases of raw materials, goods and services prior to resale. The theory of value added can be illustrated by reference to a simplified profit and loss account showing the four basic elements used in its calculation, namely:

  1.  

    •     profit

  2.  

    •     wages and salaries

  3.  

    •     inputs (ie purchases of raw materials, goods and services)

  4.  

    •     outputs (ie sales)

It will be seen that value added can be calculated by two methods represented by the following formulae:

Tax can be

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