Value Added Tax (VAT) deduction procedure from contract price.

Frequently we do mistakes in calculation of Value Added Tax (VAT). For example, if total contract price including VAT is Tk. 100 then what will be amount of VAT when applicable VAT rate is 15% (fifteen per cent)? Many people think that amount of VAT will be Tk. 15.00, but actually it shall be Tk. 13.04347826 i.e 13.04 when rounded to two digits. So what is the exact procedure for calculating VAT? Let us discuss.

How to calculate Value Added Tax (VAT):
According to principle of VAT, VAT is payable by the buyer on the amount charged by the seller. So VAT is applicable on the amount of sale / contract price excluding VAT but including IT.
Following two simple formulae are used for calculation of VAT:
VAT Formula #1: V = Ci * v /100
VAT Formula #2: V = Ct * v / (100+v)
Where,
V = VAT amount
Ci = Contract / sale price excluding VAT but including IT
Ct = Total Contract price including VAT and IT
v = VAT rate (percentage)

Example 1: Contract price without VAT is Tk. 200 and applicable VAT is 10%.
So, VAT amount, V = Ci * v /100 = 200 * 10/100 = 20 Tk.
Example 2: Contract price including VAT is Tk. 200 and applicable VAT is 10%.
So, VAT amount, V = Ct * v / (100+v) = 200 * 10/(100+10) = 18.18 Tk.

If you are interested to learn how the above two formulae are derived then read below explanation.
Steps to calculate Value Added Tax (VAT):
Situation #1:
Contract / sale price excluding VAT but including IT is known and VAT to be calculated.
Here the base value for VAT calculation i.e. price excluding VAT is known. So we can calculate VAT amount straight forward by calculating percentage on this amount as explained below:
VAT Formula #1:
V = Ci * v /100
Where,
V = VAT amount
Ci = Contract / sale price excluding VAT but including IT
v = VAT rate (percentage)

Situation #2:
Total Contract / sale price including VAT and IT is known and VAT to be calculated.
Here the base value for VAT calculation i.e. price excluding VAT is not known. Let's try to derive a formula for this situation.
Given,
Total Contract price including VAT and IT = Ct,
VAT rate (%) = v,
Let,
Amount of VAT = V,
Thus, Contract price excluding VAT, Ci = Ct - V
We know:
V = Ci * v /100 <---- (According to VAT Formula #1)
=> V = (Ct - V)* v/100
=> 100V = v*Ct - v*V
=> 100V + v*V = v*Ct
=> (100+v)V = v*Ct
=> V = v*Ct / (100+v)

So we get following formula for situation #2 where total contract price is given.
VAT Formula #2:
V = Ct * v / (100+v)
Where,
V = VAT amount
Ct = Total Contract price including VAT and IT
v = VAT rate (percentage)

Many of us do mistakes by applying vate rate on the total contract amount which is wrong.
Still have confusions? Check VAT calculation using the VAT calculator of NBR to check accuracy of the above mentioned two VAT calculation formulae.