Tax-inclusive price means that tax is included in the price of the item. It is often hidden in the invoice.
Tax exclusive price means that tax is added on top of the price displayed on invoice at the time of the sale. It is explicitly exposed in the invoice. Suppose an item costs taka 100 before tax and is subject to a taka 15 value added tax. The tax-exclusive tax rate would be 15 percent, as the tax is 15 percent of the pre-tax selling price. The tax-inclusive rate would be about 13.04 percent, which is obtained by dividing the taka 15 tax by the total cost to the consumer taka (100 + 15). (15/100+15) Thus, the difference between the two definitions is whether or not the tax paid is included in the denominator when calculating the tax rate.
Although there is no single correct way to report a VAT rate, it is crucial to understand which approach is being used. The tax-inclusive rate will always be lower than the tax-exclusive rate, and the difference increases as the rates rise. At a rate of 1 percent, the difference is negligible, but a 50 percent tax-exclusive rate corresponds to a 33 percent tax-inclusive rate, which is a big difference.
Sales tax rates are typically quoted in tax-exclusive terms, but income tax rates are typically quoted as tax inclusive. In business, it is common to issue and receive invoices for goods or services where the price is inclusive of tax. Inclusive of tax means that the price quoted includes the value of tax. In such cases, a person has to do a back-calculation to arrive at the value of tax.
In this blog, we will discuss the simple formula for you to arrive at the value of tax when the price quoted for goods or services is inclusive of tax.
Formula to calculate VAT from Tax inclusive Value
The calculation method of VAT inclusive price under the Value Added Tax and Supplementary Duty ACT 2012 is:
Tax amount = Value inclusive of tax X R ÷ (100+ R)
Here R stands for Rate of VAT
Let us discuss an example to understand this:
Mr. Rahim in Stadium market supplies a television to Mr. Karim in Rampura. The television’s price inclusive of VAT is Taka 50,000. Mr. Rahim calculates in the following method to arrive at the value of tax.
Here, VAT rate applicable to television is 15%.
Let us arrive at the value of VAT in this case:
Value inclusive of tax= Taka 50,000
Tax rate= 15
Here, VAT amount= 50,000*15/115= Taka 6521.74
Are all values of new VAT law inclusive? The answer is yes and no. Taxable of value of local supply is almost inclusive in most cases. One exception is visible while charging fixed VAT. It doesn’t follow any rule. Fixed VAT is almost similar to tariff value. It is determined by the Parliament as it is included in the third schedule which is integral part of the law. Value is absolutely immaterial for calculating fixed VAT. Thumb rule theory is here applied for the purpose of fixing VAT per unit. Base value of VAT at import stage is tax exclusive. (Base value for VAT= Assessable Value+Customs duty+Regulatory duty+Supplementary duty) The charging provision remains same as it was imposed at import stage under the VAT Act 1991.
Former President of USA Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.” He thus emphasized the inevitability of Taxes, although Taxes are the most hated things for the people who have to bear the burden of Taxes. To avoid this hatred Tax collection mechanism is formulated in such a way that people can not understand the impact of tax in sales invoice.
Tax inclusive price hides tax incidence in a sales invoice. On the contrary, tax exclusive price printed in an invoice clearly shows the amount of tax in a supply. It has some sort of negative impact on consumers’ mind. This kind of negativity sometimes forces sellers to evade taxes to win confidence of consumers.
Tax inclusive price may remove this psychological barrier which will boost revenue yielding of the government. But it is a matter of irony that VAT invoice Mushak 6.3 explicitly shows total tax impact in a single supply although value of supply is tax inclusive. As a result of issuing invoice in such format psychological barrier of consumers still exists. Previous format of Mushak 11ka was rather successful considering elimination of hatred of consumers against Taxes.