What is VAT ?

VAT stands for Value Added Tax. It’s an indirect form of taxation by the government when goods or services are bought and sold.

The VAT% may differ on country to country basis and their could be different rates say standard or reduced rate or based on categories of products and services.

Per Wikipedia - VAT essentially compensates for the shared service and infrastructure provided in a certain locality by a state and funded by its taxpayers that were used in the elaboration of that product or service.

How to Calculate VAT ?

Calculating VAT can simple if you know the VAT % using the formula below -
VAT = (product price * VAT%) / 100

Example 1: Say the VAT is 23% and as a consumer price paid to buy the product is €70
VAT = (70 * 23) / 100
= 1610 / 100
= 16.10
Product price before VAT = 70 – 16.10 = € 53.90

Example 2: Say, John is a store owner and want to sell his product for €100, but this is the amount he want to get, in this case John will need to add VAT to the price of the product before selling to the consumer.
VAT = (product price * VAT%) / 100

VAT = (100 * 23) / 100
VAT = €23
Product sold at = 100 + 23
= 123
So, the consumer ended up paying extra €23

Discussion and Opinion on VAT with Example

Reality – Who ends up paying the VAT ?

End user/general public or in beautiful words the tax payer.
Which means you may be paying income tax on the money you earn but when you go into the market as a consumer you may additionally pay VAT based upon your country.

Say, your hard earned income is €3000 a month and taxed at average 35%.
Which means the tax amount is €1050.00 and the take home pay after tax is €1950
With €1950 you go to the market, for this examples sake you spend it all on groceries, perfumes, rent, car payment and other things.

Now, here is where VAT comes into play.

For example: In Ireland the VAT is 23%
So, the tax paid on the above transaction will be 23% of €1950 = 448.50
The actual cost of those products services was only –
1950 – 448.50 = 1501.50

So, on paper your income is €3000 but after all the taxes you only have half the buying power.

In other words, for every €1 earned in reality you just earned 0.50 cents.

Wow, this makes me sad, governments do insist taxes are necessary and to be honest they are but multiple taxations (direct and indirect) are just too much for an average household and puts so much financial strain on people regard less of their hard work.