How does value added tax (VAT) incl. input tax deduction work?
Value added tax (VAT) is a general consumption tax. As the name suggests, VAT is used to tax the added value of the consumer. How this is calculated is shown below in an example.
VAT incl. input tax deduction explained by an example
It should be noted that there are two different methods of accounting for VAT; the effective method and the balance tax rate method. The following example refers to accounting according to the effective method, which is used by most Swiss companies.
Example:
Shirts plc imports shirts from Italy for CHF 100 per piece. When importing these shirts into Switzerland, the company pays 7.7% VAT on each piece (CHF 7.70 per piece).
Later, Shirts plc sells the imported shirts to various fashion shops for CHF 150 each. On top of the price of CHF 150.- per shirt, Shirts plc must charge an additional 7.7% VAT (CHF 11.55 per piece), so that the fashion shop end up paying CHF 161.55 including VAT per shirt.
How much VAT does Shirts plc have to pay to the tax administration?
Shirts plc has received CHF 11.55 per shirt in VAT from the fashion shops that bought the shirts. Normally, this amount would have to be paid to the tax administration.However, since Shirts plc has already paid CHF 7.70 per shirt in VAT when importing the shirts, the company can deduct this from the amount owed. The input tax is therefore the VAT already paid in advance by the company (even before it has sold its products or services and collected VAT).
In the end, only the added value, i.e. the CHF 50 mark-up paid by Shirts plc was taxed (7.7 % of CHF 50 = CHF 3.85).
1. Shirts plc paid CHF 7.70 in VAT per shirt;
2. Then received CHF 11.55 in VAT per shirt;
3. Finally, the CHF 7.70 (= input tax) has been deducted from the CHF 11.55 and the difference of CHF 3.85 was paid.
The following table gives an overview of this once again:
Shirts plc can now not only deduct the VAT on the import price (CHF 7.70) as input tax, but also the VAT on all other services it has purchased. These can be, for example, costs for transportation, real estate and storage material. Shirts plc can deduct as input tax all the VAT it has paid for itself, which ultimately reduces the tax amount even further.
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