Definition of Input Tax
Input tax refers to the Value Added Tax (VAT) that a taxable person pays when purchasing goods or services from another VAT-registered trader. It is the tax that businesses can reclaim from their purchases of taxable goods or services. Input tax is essential in VAT systems as it directly impacts the final amount of VAT payable to tax authorities. The input tax, except for irrecoverable input VAT, is subtracted from the output tax (the VAT collected from selling goods or services) to establish the amount of VAT to be paid to the tax authorities.
Examples
-
Manufacturing Company: A manufacturing company purchases raw materials worth $10,000, and the VAT rate is 10%. The input tax paid on these materials would be $1,000 ($10,000 * 10%). If the company sells the finished goods for $20,000, with a VAT of $2,000, the input tax can be subtracted from the output tax to determine the VAT payable ($2,000 - $1,000 = $1,000).
-
Retail Business: A retail store buys inventory for $5,000 plus $500 in VAT. The store later sells the items for $8,000, charging $800 in VAT. The input tax of $500 will be used to offset the output tax of $800, resulting in $300 payable to the tax authorities.
Frequently Asked Questions (FAQs)
1. Can all input tax be recovered?
No, not all input tax can be recovered. Some input VAT may be deemed irrecoverable depending on the nature of the expense or specific VAT regulations.
2. How does input tax affect a business’s cash flow?
Input tax can positively affect a business’s cash flow by reducing the amount of VAT that needs to be paid to tax authorities, thereby retaining more working capital within the business.
3. What is the difference between input tax and output tax?
Input tax is the VAT paid on purchases, whereas output tax is the VAT collected on sales. The difference between the two determines the VAT payable or refundable to the tax authorities.
4. When can input tax be claimed?
Input tax can generally be claimed when the business submits its VAT return, but specific time limits and conditions may apply depending on the jurisdiction’s regulations.
5. Are there any exceptions to claiming input tax?
Yes, certain expenses like business entertainment costs and specific non-business activities may not qualify for input tax recovery.
Related Terms with Definitions
- Value Added Tax (VAT): A consumption tax levied on the value added to goods and services at each stage of production or distribution.
- Taxable Person: An individual or business entity that is registered to charge VAT on their taxable supplies.
- Irrecoverable Input VAT: VAT on purchases that cannot be reclaimed, typically due to specific business activities or regulatory restrictions.
- Output Tax: The VAT collected by a business on its sales of goods or services, which must be paid to the tax authorities.
Online References to Online Resources
Suggested Books for Further Studies
- “Value-Added Tax: A Comparative Approach” by Alan Schenk
- “VAT and Financial Services” by Robert F. Van Brederode
- “VAT Handbook” by Geoff Hull
- “The International Handbook of Taxation” by John Tiley
Accounting Basics: “Input Tax” Fundamentals Quiz
Thank you for learning about “Input Tax”. Continue to explore our accounting resources and challenge yourself with our quizzes to excel in your financial knowledge and expertise!
