Especially in the areas of accounting and tax, it is difficult for many entrepreneurs to keep track of things. As a general rule, every company is subject to sales tax. As an entrepreneur from RSM tax service in thailand, you are therefore obliged to pay the so-called turnover tax to the tax office. At the same time, there is the right to deduct input tax. This means that the value added tax paid on supplier invoices (input tax) – in the form of the well-known value added tax – may be deducted from a company’s total value added tax liability.

The terms input tax, value added tax and value added tax often cause confusion, as they are often used side by side or even synonymously. But what exactly is meant by these terms? How can the input tax be calculated and what should you urgently consider when filing for input tax? We will explain to you exactly how the input tax and VAT process works.

Input Tax, Value Added Tax and Value Added Tax

The terms input tax, turnover tax and value added tax refer in principle to the same tax regime. The use of the different terms is due to the fact that the designated tax can be viewed from several points of view.

VAT is a colloquial term in Germany, even though it can be found on many receipts. The official term in German legislation is sales tax. Input tax, on the other hand, is the term used to describe the value added tax that entrepreneurs have to pay themselves when purchasing goods or services. If a company is entitled to deduct input tax, it can reduce its own VAT liability with the input tax paid in accordance with § 15 of the Value Added Tax Act (EStG) or the input tax is refunded by the tax office (so-called input tax deduction). The following sections explain why this is so and how exactly the input tax deduction works.

Input tax, sales tax and value added tax

The terms input tax, turnover tax and value added tax refer in principle to the same tax regime. The use of the different terms is due to the fact that the designated tax can be viewed from several points of view.

VAT is a colloquial term in Germany, even though it can be found on many receipts. The official term in German legislation is sales tax. Input tax, on the other hand, is the term used to describe the value added tax that entrepreneurs have to pay themselves when purchasing goods or services. If a company is entitled to deduct input tax, it can reduce its own VAT liability with the input tax paid in accordance with § 15 of the Value Added Tax Act (EStG) or the input tax is refunded by the tax office (so-called input tax deduction). The following sections explain why this is so and how exactly the input tax deduction works.

Fact
At the European level, on the other hand, the term VAT is more common than VAT.

Benefit from input tax deduction

If you are an entrepreneur, you usually have to buy goods and/or raw materials or make use of essential services. Such operating expenses are, for example, material purchases and repairs ordered. For these you pay the customary value-added tax of 7 or 19 percent. This means that you have made an input tax payment without making a profit – at least at this point in time.

However, from the point of view of the other company from which you purchased your materials, there is no additional profit with your input tax payment. The company must pay the amount at the same tax rate to the tax office at the end of the year. The tax office claims the so-called sales tax here.

With your right to deduct input tax, you can deduct the input tax you have paid from your sales tax liability by means of the so-called advance return for sales tax or receive the difference back from the tax office. This procedure ensures that the tax burden is borne not by the companies but by the end consumers – through the value added tax they pay on the product or service to the company.

Fact

Input tax may be deducted from operating expenses only if they are deductible. For this purpose, business expenses must be clearly identifiable as expenses for business purposes. For example, expenses for lifestyle and household, income tax and other personal taxes as well as fines, reminder fees or compensation payments are not eligible for input tax deduction.

An example of how to calculate input tax

A craftsman needs wood material to build a garden house. He buys the raw materials from company X. This offers him solid wood panels with a total net value of 1,000 euros. In addition to 19 percent VAT, the total selling price is 1,190 euros gross. If the tradesman buys the product at the specified price, Company X must pay VAT of 190 euros to the tax office. The craftsman has practically paid the input tax.

With the acquired parts the craftsman can now finish the garden house. The selling price is with 2.000 euro net, plus 19 per cent value added tax with 2.380 euro gross. The customer pays also here again the value added tax at a value of 380 euro, which goes over to the tax office. So that the craftsman does not remain however on its costs from the purchase of the necessary raw materials remains, it can deduct its performed input tax at a value of 190 euro from its entire value added tax debt. This means: In the end, the craftsman pays only 190 euros in sales tax instead of 380 euros.

 

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