Value-added tax calculation methods

Value-added tax calculation methods

(Value-added tax calculatiom methods) Value added tax (VAT) is one of the common tax for any company paid during the operation. Nowadays, when having a decision or starting to implement the decision to establish a company, the owner need to determine that which VAT calculation method that his or her company should use.

Legal bases:

  • Law on Value-Added Tax 2008
  • Law No.31/2013/QH13 Amending and Supplementing a number of Articles of Law on Value-Added Tax

(Value-added tax calculation methods) Currently, Article 9 of Law on VAT regulating that there are two VAT calculation methods which are VAT credit method and method of calculation of tax based directly on added value.

1. Tax credit method

a. Way to determine the amount of must-paid tax.

The amount of must-paid tax = The amount of output VAT _ The amount of creditable input VAT

In which:

  • The amount of output VAT is the total amount of VAT on sold goods and services indicated in the added value invoice;
  • The amount of creditable input VAT is the total VAT amount indicated in the added-value invoice on goods, and must satisfy the conditions specified in Article 12 of this Law.

b. The applicable subjects:

(Value-added tax calculation methods) The tax credit method applies to business establishment which fully observe regulations on accounting, invoices and documents and include:

  • Business establishments with annual revenues of one billion Vietnam dong or more from selling goods and providing services, excluding business households and individuals;
  • Business establishments voluntarily registering to apply the VAT credit method. excluding business households and individuals;

2. Method of calculation of tax based directly on added value

a. Way to determine the amount of must-paid tax (excluding gold, silver and gm sale, purchase and processing)

The amount of must-paid tax = Percentage x Turnover

In which:

  • The percentage to calculate VAT is regulated as follows:
  • Goods distribution and supply: 1%
  • Services, construction that does not cover materials: 5%
  • Production, transport and services associated with goods, construction that covers materials: 3%
  • Other business activities: 2%

b. The applicable subjects:

  • Businesses and cooperatives with annual turnover of below one billion Vietnam dong, excluding those making voluntary registration for the application of the tax credit method stipulated in Clause 2, Article 10 of this Law;
  • Business households and individuals
  • Foreign business organizations and individuals without Vietnam-based resident establishments but having incomes generated in Vietnam that fail to fully observe regulations on accounting, invoices and documents, excluding foreign organizations and individuals providing goods and services for oil and gas prospecting, exploration, development and exploitation and having their tax credited and paid by the Vietnamese side
  • Other economic entities, excluding those making registration for the application of the tax credit method

Thus, from the above provisions, we can derive that the method of tax credit will be more beneficial to the enterprise than the method of calculating tax directly on the added value because with the deduction method, the enterprise will be deducted, meaning there will be no need to pay the input VAT. In case the input VAT amount is nearly equal to the output VAT amount, it means that the tax amount to be paid by the enterprise is very small. On the other hand, with the direct tax calculation method, the input value added will not be deducted, leading to a higher amount of tax that businesses have to pay.

Therefore, when established, businesses should try to meet the conditions to be applied to calculate VAT by Tax credit method.

http://www.hnlaw.vn/en/enterprise-consultancy/

https://en.wikipedia.org/wiki/Value-added_tax

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