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Percentage and its Applications - Sales Tax and Value Added Tax (VAT)

Grade 8ICSE

Review the key concepts, formulae, and examples before starting your quiz.

🔑Concepts

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Sales Tax and VAT Definition: Sales tax is an additional percentage charged by the government on the sale of goods. In a bill, imagine the 'Selling Price' as the base layer, and the 'Sales Tax' as an extra layer added on top to reach the final 'Total Amount'.

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Calculation Base: Tax is always calculated on the actual Selling Price (SPSP) of the article after any discounts have been deducted. On a retail receipt, this is the 'Subtotal' amount you see before the tax line is added.

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Value Added Tax (VAT) Mechanism: VAT is a multi-stage tax where tax is paid at every stage of the supply chain (Manufacturer to Wholesaler to Retailer). Each person in the chain pays tax only on the 'Value Added'—which is the difference between their selling price and their purchase price.

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Input Tax and Output Tax: For a business, 'Input Tax' is the tax paid when purchasing goods (money flowing out), while 'Output Tax' is the tax collected from customers when selling goods (money flowing in). Visually, the net tax sent to the government is the difference between these two 'buckets' of money.

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Tax-Inclusive Pricing: Sometimes the price of an article is stated as 'Inclusive of all taxes'. In this case, the listed price represents 100%100\% of the value plus the tax percentage. To find the original price, you must mathematically separate these components using the total bill formula.

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The Flow of VAT: Consider a flow chart where an item moves from PersonA→PersonB→PersonCPerson A \rightarrow Person B \rightarrow Person C. Each person calculates tax on their selling price, subtracts the tax they previously paid, and pays the balance to the government.

📐Formulae

SalesTaxAmount=Rate of Tax100×SellingPriceSales Tax Amount = \frac{\text{Rate of Tax}}{100} \times Selling Price

TotalBillAmount=SellingPrice+SalesTaxAmountTotal Bill Amount = Selling Price + Sales Tax Amount

SellingPrice(beforetax)=TotalBill×100100+Rate of TaxSelling Price (before tax) = \frac{Total Bill \times 100}{100 + \text{Rate of Tax}}

VATPayable=OutputTax−InputTaxVAT Payable = Output Tax - Input Tax

VATPayable=Tax Rate100×(SellingPrice−PurchasePrice)VAT Payable = \frac{\text{Tax Rate}}{100} \times (Selling Price - Purchase Price)

💡Examples

Problem 1:

A digital camera is marked at ₹15,00015,000. The shopkeeper allows a discount of 20%20\%. If sales tax is charged at the rate of 12%12\%, find the amount the customer has to pay for the camera.

Solution:

  1. First, find the Selling Price (SPSP) after discount: Discount=20% of 15,000=20100×15,000=₹3,000Discount = 20\% \text{ of } 15,000 = \frac{20}{100} \times 15,000 = ₹3,000 SP=MarkedPrice−Discount=15,000−3,000=₹12,000SP = Marked Price - Discount = 15,000 - 3,000 = ₹12,000

  2. Now, calculate the Sales Tax on the SPSP: SalesTax=12% of 12,000=12100×12,000=₹1,440Sales Tax = 12\% \text{ of } 12,000 = \frac{12}{100} \times 12,000 = ₹1,440

  3. Calculate the Total Bill Amount: TotalAmount=SP+SalesTax=12,000+1,440=₹13,440Total Amount = SP + Sales Tax = 12,000 + 1,440 = ₹13,440

Explanation:

Tax must be calculated on the price actually paid after the discount is applied, not the initial marked price.

Problem 2:

A shopkeeper buys an article for ₹8,0008,000 and sells it for ₹10,00010,000. If the VAT rate is 10%10\%, calculate the VAT paid by the shopkeeper to the government.

Solution:

  1. Calculate the Input Tax (Tax paid on purchase): InputTax=10% of 8,000=10100×8,000=₹800Input Tax = 10\% \text{ of } 8,000 = \frac{10}{100} \times 8,000 = ₹800

  2. Calculate the Output Tax (Tax collected on sale): OutputTax=10% of 10,000=10100×10,000=₹1,000Output Tax = 10\% \text{ of } 10,000 = \frac{10}{100} \times 10,000 = ₹1,000

  3. Calculate the VAT payable: VATPayable=OutputTax−InputTax=1,000−800=₹200VAT Payable = Output Tax - Input Tax = 1,000 - 800 = ₹200

Alternatively, calculate tax on the 'Value Added': ValueAdded=10,000−8,000=₹2,000Value Added = 10,000 - 8,000 = ₹2,000 VAT=10% of 2,000=₹200VAT = 10\% \text{ of } 2,000 = ₹200

Explanation:

The VAT payable to the government is the difference between the tax collected from the consumer and the tax already paid to the supplier.