Tax is a well-known term, but do you know how exactly are things taxed and what are implications of the same. We pay tax on many things and services yet knowing the ways to calculate the same can help us know the right amount needed to pay the same. In the chapter below we shall learn about the calculations of the revenue system.
When we go grocery shopping we see on the bill an added tax that we need to pay apart from the commodity purchase. These are the general taxes that we need to pay in our lives. Taxes may be of various types, some of them are:
- Service Tax: It is levied on the services provided by an organization or entity.
- Sales Tax: Sales tax is levied on us when we buy items. It is charged by the government on the sale of any item. The shopkeeper takes it from us and gives it to the revenue collection system of the country. We as customers pay him the sales tax with the final bill for our purchase. A sales tax is an amount apart from the selling price of the commodity purchased.
- Value Added Tax(VAT): Value added tax is an added the amount on the purchase of an article that increases the price of that item at each stage of production to distribution.
As an indirect form and sales taxes are paid to the entities selling products for the services of a sale of goods to customers. It is charged in the percentage of the selling price of the product at the time of purchase of that item.
The percentage depends on the guidelines and policies of the government. In a nutshell, sales taxes apply to the extra money paid by the customer to the seller in lieu of purchases made and services accessed.
How to calculate Sales Tax?
As mentioned in the definition, sales taxes depend on the policies of the governing entity, hence there is no general criterion for calculation of the same.
The cost of a pair of jeans at a shopping mall was Rs 5,500. The S. T. charged was 7%. Find the billing amount.
Solution: According to the rule of percentage, for every amount of Rs 100, the tax was Rs 7. So on Rs. 5,500 the tax paid shall be: 7/100 × 5,500 = 7×55 = Rs.385. Therefore, the Bill Amount = Cost of Item + Sales tax = Rs 5,500+Rs 385 = Rs 5,885.
Value Added Tax
It is a form of consumption tax of an item and is added to the same item at each stage of production to distribution. Unlike sales tax, that is levied only on the billing stage, VAT is levied at every stage of the supply chain of a product.
How to calculate VAT?
VAT is also levied according to the policies of the governing body and is submitted to the central revenue authority.
Solved Example For You
Q1. Sumit bought an Air Conditioner worth Rs 55,000. It included the VAT of 10%. Find the price of the air conditioner before VAT was added.
Solution: The Air conditioner bought by the customer includes VAT of 10%. This means that he has paid 10% extra apart from the cost price of the item. Now if the original price of the Air conditioner is Rs 100, he has paid Rs 110 so the original price of the commodity shall be =100/110× 55,000 = Rs 50,000
From the above discussion, we can clearly understand the difference in the various taxes levied on our purchases. So the next time you go shopping, keep an eye on the extra amount you are paying!
Q2. What are tax and its types?
A2. Tax refers to a compulsory contribution to the state revenue that the government levy on the income of workers and business gains or added up to the cost of some transactions, services, and goods. Broadly there are two types of tax namely:
- Direct Tax
- Indirect Tax
Q3. What is the purpose of the tax?
A3. The government levy taxes on individuals or entities by the government. Furthermore, taxes are levied on almost every citizen of every country. Because taxes are the main source of revenue for the government and they serve their purpose pretty well.
Q4. What is a progressive tax?
A4. In progressive tax systems, they have different tiers, where they charge a different amount of taxes from the individual on the basis of their income. In it, individual with higher income have to pay more tax and people with lower income have to pay less tax.
Q5. What is a regressive tax?
A5. It is a tax system in which tax is applied evenly, taking a larger percentage of income from low-income earners. On the other hand, taking a smaller percentage of income from high-income earners. Moreover, this taxation system is just the opposite of the progressive tax.