Deanship of Postgraduate Studies

Al-Quds university
Master of Accounting and Taxes

Tax Accounting

: Assignment 4

VAT Taxation methods supported by empirical cases

 CREDIT-INVOICE METHOD

Most countries with a value-added tax (VAT) employ the credit-invoice method. All sales by businesses
are taxable, but sellers pass invoices on to the VAT-registered business taxpayers who purchase the
sellers’ goods and services. These purchasers, in turn, claim a credit for taxes paid but then pay VAT on
the full value of their sales. The result is that there are no net taxes on sales between registered VAT
businesses, while the full value of the final sale to the consumer bears tax

Example:

AssumeWheatFarmergrows,harvests,andsellswheattoMillerfor$50, payinga$5VAT(10%x$50saleprice).
MillerprocessesthewheatintoflourandsellsittoBakerfor$150,paying a
VATof$10[(10%x$150salesprice=$15)minuscreditof$5paidonprevious business inputs by Wheat Farmer,
as reflected on the invoice received]. Baker bakes the wheat into bread and sells it to Retailer for $300,
paying a VAT of $15[(10%x$300salesprice=$30) minus inputs credit of $15 paid on previous business
inputs paid by Wheat Farmer and Miller] .Retailer sells the bread to consumers for $500, paying a VAT
of $20[(10%x $500 sales price=$50) minus inputs credit of $30 paid on previous business inputs paid by
Wheat Farmer, Miller ,and Baker].

In this example ,a total of $50 VAT has been paid to the government in four stages.

 SUBTRACTION METHOD/Deduction Method

Under a subtraction-method VAT, sometimes called a business transfer tax, businesses pay tax on the
difference between the value of their sales and the value of their purchases from other businesses. As
with the credit-invoice VAT, the sum of all the amounts subject to tax, without exemptions, is equal to
the value of final sales.(‫)معدل الضريبة *المشتريات‬-(‫) معدل الضريبة *المبيعات‬

‫ وهي الطريقة المستخدمة في فلسطين‬.

‫ شيقل‬8000‫ شيقل وكانت المشتريات في ذلك الشهر تساوي‬12000 ‫بلغت قيمة المبيعات في مكتبة عين كارم لشهر أكتوبر‬:‫مثًال‬

(12000*16%)-(8000*16%)

1920-1280
. ‫ معدل ضريبة القيمة المضافة‬640 ‫شيقل‬

 Addition method:

This method is based on the identification of value-added which can be estimated by summation of all
the elements of value-added (i.e. wages, profits, rent and interest). This method is known as addition
method or income approach. This is in line with the income method of calculating national income.

A comparative picture of the three methods of calculating VAT is presented in Table:

Total Retailer Wholesaler Manufacturer Methods Sl. No.

Economy

4 3 2 1

650 200 300 150 Addition method 1

170 20 100 50 a. Wages

120 20 75 25 b. Rent

60 10 25 25 c. Interest

1000 250 500 250 d. Profit

100 25 50 25 e. Value Added (a+b+c+d)

f. VAT

2300 1100 850 350 Substraction method 2.

1300 850 350 100 a. Sales

1000 250 500 250 b. Purchases

100 25 50 25 c. Value added (a-b)

d. Vat

2300 1100 850 350 Invoice method 3.

230 110 85 35 a. Sales

1300 850 350 100 b. Tax on Sales

130 85 35 10 c. Purchases

100 25 50 25 d. Tax on purchases

e. VAT (b-d)
https://www.taxpolicycenter.org/briefing-book/how-would-vat-be-collected

https://accountsknowledgehub.in/methods-of-computation-of-vat/

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://eclass.alquds.edu/pluginfile.php/
1471470/mod_resource/content/1/international%20tax%20system.pdf

https://www.slideshare.net/RAJESHJAIN65/vat-value-addition-tax