What is Input VAT or Output VAT and the Difference?
In the business world, it is crucial to understand concepts like input VAT and output VAT. Whether you are selling a product or buying it, the amount you pay or receive depends on value-added tax (VAT); that’s why it is important to understand and track input VAT and output VAT.
Let’s learn what input VAT or output VAT and the differences and how it impacts businesses.
The input VAT is the tax added to the costs of goods or services that a business buys.
Conversely, the output VAT is the additional cost or tax that customers and businesses pay on buying services or goods from a seller who is registered for VAT.
The input VAT and output VAT are the two main pillars of businesses.
Understanding Input VAT
VAT a.k.a value-added-tax is the additional cost a company or a business bears while purchasing goods or services. You can calculate your add or remove VAT as well. This additional amount can be deducted later through VAT return. Remember, you can only get the VAT return if your company or business is registered in South Africa.
As a businessman, I advise all business owners to get the VAT registration as soon as possible to get the most out of it. In case your company or business is not VAT-registered, you will still pay the input VAT and might never get a chance to refund the taxable amount.
Let me brief you about input VAT with an example. The input VAT includes the utilization of the company’s resources to operate a business such as purchasing raw materials, office supplies, advertising a project, etc. A VAT-registered company can get all these taxes back from the government, which reduces the overall bill.
How to Calculate Input VAT?
If you own a business, you must be interested in the input VAT calculation process. It is a simple, straightforward process and you will need the following to calculate input VAT:
- Invoices and receipts of all your purchases such as office supplies, raw materials, equipment, etc.
- Verify the VAT information on invoices and receipts. Ensure that the VAT rate and VAT amount are correct in these documents to avoid any miscalculations.
- Add all the VAT amounts. The value you will get is the input VAT you have paid.
Understanding Output VAT
Output VAT is the tax that a VAT-registered company or business charges its customers for their goods or services. The collected tax is then paid to the tax authorities. It is called output VAT because this amount is generated as output from a business’s sales.
Simply put, VAT-registered companies collect tax from customers on behalf of the government. Moreover, if a company fails to collect correct output VAT, it may face penalties and other legal charges from the country’s tax authorities.
The major difference between the two is that input tax is paid by businesses on purchases, while output VAT is the tax or amount collected from customers on sales. Understanding both is crucial for businesses because it aids in managing tax liabilities, optimizing the financial operations of a business, and avoiding penalties.
How to Calculate Output VAT?
Like input VAT, calculating output VAT is super easy and simple. Follow the below-mentioned steps to calculate it.
- Spot your total sales or revenue generated by your VAT-registered business e-g your selling products, services, or taxable transactions.
- Once you have all the sales data, multiply the total sales revenue by the current VAT rate. The applicable VAT rate in South Africa is 15%. The amount you get by multiplication is the output VAT you owe to the tax authorities of your country.
Input VAT Vs Output VAT | What’s the Difference?
The VAT journey does not end with calculating input VAT and output VAT. You can also determine the difference between the two by subtracting the calculated total input VAT from the output VAT.
Have you calculated your VAT amounts, what did you get? If the input VAT is more than the output VAT then you can get a VAT refund. However, if your output VAT is greater than your input VAT then you will have to pay the amount difference to the tax authorities.
Whether you owe the VAT amount to the tax authorities or vice versa, just make sure you report the accurate VAT calculations to the concerned department to get your VAT return or pay the taxable amount to the authorities on time. Anyone who fails to do so may face harsh penalties and other legal charges.
What is input and output VAT in South Africa?
Input VAT is the amount a company pays on purchases to produce goods or provide their services. Whereas, output VAT is the amount generated by the sales of a business.
Is input VAT debit or credit?
The input VAT is a credit as it is refunded by the tax authorities if a company fulfills the VAT refund requirements.
Is input VAT an asset?
Yes, input VAT is an asset that will generate revenue in the future.
Do you pay input or output VAT?
Businesses and companies pay input VAT while consumers and customers pay output VAT.
Input VAT and output VAT are essential parts of the VAT system and businesses. The input VAT is the tax a company pays on its purchases and the output VAT is the tax the business charges from its consumers on its sales and goods. The key difference between the two is that one is related to business expenses (input VAT) and business income (output VAT).