Difference between direct and indirect taxation,how to calculate VAT?

What is a tax?

Tax is the charge which has to be given by the citizen to the government in support. Tax must be paid on your income and on your assets according to each government.  Government runs through proper tax payments by the people of that country.

What is the difference between Direct and Indirect Taxation?

Direct Taxation is the tax which is collected directly from the individuals who earns an income  has to pay this tax  examples of direct tax are ( corporation
taxes, income taxes etc.)

Indirect taxation is the tax which is collected indirectly these taxes are known as indirect taxation.  If you do a business you tend to pay (service tax, sales tax) for your sales. And in other areas we need to pay indirect taxes such as in the products ( Petrol , alcohol and cigarettes) when it comes to vehicles excise duty  must be paid for vehicles, road tax etc.

What is VAT?

This tax is an indirect tax as far as consumers are concerned.In contrast to the service tax / sales tax VAT is value added tax for the goods a person purchased.

How to calculate the Principal of VAT?

Formula is (% on the price of the product – all tax previously paid on the goods.) with 10% charged for VAT for each 100$ product manufacturer has to pay 10$ as VAT. Seller of the materials has to pay 10$ to the government. Manufacturer will charge the retailer as 132$(120$ + 120$ x 10%) and pays the government 2$ , keeping the same profit margin of 20$. Then retailer charge the end consumer 165$ (150$ +150$ x 10%) and pay the government 3$ having the profit of 30$ (165-132-3). You can imagine the end consumer has paid 10% extra on the product where as the business people have not lost anything. Only advantage VAT can have, the businesses cannot hide their invoices, they cannot show false accounts to the government.

For example if VAT rates are 10% of the total cost of the goods, i.e. if you want to buy a burger which costs 20$ in the market, 10% of VAT for 20$ is charged as VAT.  You need to show the difference in tax between the invoices passed and received is VAT tax.

VAT tax has been greatly criticized as the poor pay more than the rich.


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