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What Are Input Tax And Output Tax

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What is Input Tax?

Input Tax is an Indirect tax such as VAT(Value added tax) levied on capital goods used directly in the process of manufacturing such as raw materials, spare parts, services etc., which a business consumes in its operations. Input tax is the tax paid on purchase of goods or services by a registered dealer(with HMRC) in course of his business.

When a VAT registered company buys goods or services from another supplier, VAT is charged on the purchase cost. This is known as input tax. Every quarter the company have to submit a VAT return giving details of its input tax that shows all their VAT inputs (where the company has paid VAT on its purchases). If outputs exceed inputs, the company has to pay the difference to the government. If inputs exceed outputs, the company can claim a refund from HM Revenue and Customs.

Input Tax Credit

Input tax credit is setting off of the difference amount of input tax and output tax by a registered dealer. A registered dealer assigned with TIN is entitled to claim input tax credit.

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What is Output Tax?

Output tax is the VAT charged on the sale of taxable goods by a registered dealer assigned with TIN. Output tax is the VAT you charge to your customers. Companies registered with HMRC for VAT have to charge VAT on their goods and services according to the provisions of the state law. Every quarter they have to submit a VAT return that shows all their VAT outputs (where the company has received VAT from its customers) and all their VAT inputs (where the company has paid VAT on its purchases). If outputs exceed inputs, the company has to pay the difference to the government. If inputs exceed outputs, the company can claim a refund.

The formula for computing the output tax is:

Output Tax = Sales Value * Tax Rate

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