Extract Sales tax or Value added tax (VAT) from tax inclusive values.
How to calculate the value without charge (tax free value, value with no fee)? How to extract sales tax or VAT from a tax inclusive value?
- Tax included value = Tax free value + Tax value
- Tax value = Tax% × Tax free value
- Tax included value = Tax free value + Tax% × Tax free value = (1 + Tax%) × Tax free value
- In conclusion:
Tax included value = (1 + Tax%) × Tax free value ... if we know the Tax free value
Tax free value = Tax included value ÷ (1 + Tax%) ... if we know the Tax included value
Examples of calculations with values with or without tax:
- If tax rate was 20%, (1 + Tax%) = 1 + 20% = 100/100 + 20/100 = 120/100 = 1.2 => Tax included value = 1.2 × Tax free value, and Tax free value = Tax included value ÷ 1.2;
- If tax rate was 9%, (1 + TVA%) = 1 + 9% = 100/100 + 9/100 = 109/100 = 1.09 => Tax included value = 1.09 × Tax free value, and Tax free value = Tax included value ÷ 1.09;
- If tax rate was 5%, (1 + Tax%) = 1 + 5% = 100/100 + 5/100 = 105/100 = 1.05 => Tax included value = 1.05 × Tax free value, and Tax free value = Tax included value ÷ 1.05;
- If tax was 120% (...!!!), (1 + Tax%) = 1 + 120% = 100/100 + 120/100 = 220/100 = 2.2 => Tax included value = 2.2 × Tax free value, and Tax free value = Tax included value ÷ 2.2.
Note: The U.S. is one of the few developed countries where conventional sales taxes are still used.
A sales tax is a consumption tax imposed by the government (in U.S. not the federal government) on the sale of goods and services. The sales tax is paid by the consumer to the retailer, as a percentage of the retail cost, who transfers the payment to the state.
If a person pays a bill of $525 to purchase a TV set and lives in an area where the sales tax is 5%, you can calculate that the price of the TV set was $500.
Let's say that a farmer sells apples to a company that produces cider. To avoid paying the sales tax, the cider maker must obtain a resale certificate from the government saying that it is not the end user. The cider maker then sells its product on to a retail store, which will charge the customer sales tax along with the price of cider.
VAT (Value Added Tax)
VAT is a tax charged of each economic agent involved in the business cycle of manufacturing of a product or providing a service within the scope of taxation. VAT, charged by the operators, is transferred to the state budget.
Value-added tax (VAT) is charged as a percentage of the value added at every level of production of a good. In the example above, the cider maker would pay a percentage of the difference between of what they charge for cider and what they pay for apples. Put differently; this is a tax on company's gross margins, rather than just the end user, as in the sales tax example.
There are standard VAT rates in effect, for example the standard VAT rate could be 17%, and some reduced rates could be 10% and 5% respectively, but they depend on each country.