Sales Tax and VAT

Sales tax and VAT are both forms of consumption tax charged by the government. Sales tax is a percentage of the selling price that the buyer pays to the government through the seller, while VAT (Value Added Tax) is a tax that is charged at each stage of production and sale. In India, the GST (Goods and Services Tax) replaced sales tax and VAT from July 2017. Understanding tax calculation is an important real-life skill. Understanding the tax calculation helps consumers know the real price of the goods. In this guide, you will learn how to calculate the tax amount and total bill when the tax percentage is given and how to handle situations when both a discount and tax are given.

Table of Contents

• What are Sales Tax and VAT
• Solved Examples on Sales Tax and VAT

What are Sales tax and VAT

Sales Tax: Sales tax is the tax levied by the government when a product is sold to the customer. The tax is paid through the seller; hence, it is charged on the selling price of the item and later added to the bill.

Tax =  R100  × SP

Bill Amount = SP + Tax

 ∴ Bill Amount = SP + (R100 × SP)
Where, 

R = rate of tax

SP = Selling Price.

Value Added Tax (VAT): VAT is a tax charged on the value added at each stage of production or sale. This tax is already included in the price of the product.

NOTE: The GoI introduced GST (Goods and Services Tax) in 2017, which unified the indirect tax system, replacing sales tax and VAT.

Solved examples on Sales tax and VAT

Example 1: The cost of a pair of shoes at a shop was Rs. 450. The sales tax was charged to be 5%. Find the total bill amount.
Solution: Given, cost of a pair of shoes = Rs. 450

Tax rate = 5%

Tax = (5/100) × 450 = 22.50 Rs.

∴Bill Amount = SP + Tax = 450 + 22.50 = 472.50 Rs.

Example 2: A bill amount including 10% tax is Rs 1,100. Find the selling price before tax.
Solution: Given, Tax rate = 10%
Bill amount = Rs 1,100 =  SP + R/100 × SP = SP + 10/100 × SP
1100 = SP(110/100)
SP = Rs 1000

Example 3: A watch has an MRP of Rs 3,000. A shop gives a 10% discount. GST is 18%. Find the bill amount.
Solution: Given, MRP = Rs 3000
Discount = 10% of 3000
= (10/100) × 3000 = Rs 300
Price after discount = 3000 − 300 = Rs 2700.
GST = 18% of 2700
= (18/100) × 2700 = Rs 486
∴ Bill amount =  Price after discount + GST = 2700 + 486 = Rs 3186