Input and Output Mechanism for Value Added Tax

VAT liabilities are typically settled by using an input-output mechanism. A vendor of taxable goods or taxable services must typically charge VAT to the buyer. From the vendor’s perspective, it is an output tax. The buyer has to pay the VAT to the vendor. From the buyer’s perspective, it is an input tax. To the extent that the goods or services are necessary for running the buyer’s business, the input tax can be credited against the buyer’s own output tax. If the accumulated output tax for a particular month exceeds the accumulated input tax for the same period, the taxpayer in question has to settle the difference by the end of the following month and prior to the VAT return fling deadline. If, however, the accumulated input tax for a particular month exceeds the accumulated output VAT, the taxpayer may carry over the overpaid VAT to the following months or ask for a yearly refund at the end of book year.

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