What is VAT? How to Calculate VAT (VAT Included and VAT Excluded Calculation)

Value Added Tax (VAT) is an inevitable financial obligation for every business and consumer in Turkey and is an integral part of economic activities. This tax system, which has been implemented since 1985, is calculated based on the value added at each stage of products and services. Thus, every step of goods and services in the trade chain is accurately taxed.

In this guide, we will cover what VAT is, how it is calculated, and how declarations are prepared. We will also address important topics such as how to find the VAT base, rounding procedures, and VAT rates in Turkey. Whether you are a business owner or simply someone interested in the subject, you can find the answers to all your questions about VAT in this article. Keep reading to discover the critical role of VAT in the business world!

What is Value Added Tax (VAT)?

Value Added Tax (VAT) is a type of indirect tax applied to the additional value generated during the production and distribution processes of products and services. This system, implemented in Turkey since 1985, is a type of tax that both real and legal persons are obliged to pay to the state over the income earned from their sales.

VAT is calculated on the value added at every stage of the production process of goods or services and is passed on to the consumer. For this reason, the VAT rate is indirectly charged on almost every purchase and acquisition made by consumers. The primary function of VAT is to finance government public expenditures and manage economic balances. VAT rates in Turkey vary according to the types of goods and services.

How is VAT Calculated? (Inclusive and Exclusive Calculation)

VAT is calculated based on the principle of adding VAT to (VAT inclusive) or subtracting it from (VAT exclusive) product or service prices. This calculation varies depending on the determined VAT rate and the amount to be calculated. Two main formulas are used: VAT inclusive and VAT exclusive calculation.

VAT Inclusive Calculation

This method is used to add VAT to the price of a product or service. The formula is: (Net amount) x (1 + VAT rate).

For example, for a product with a net price of 1,000 TL and a 20% VAT rate, the VAT inclusive price is calculated as 1000 x (1 + 20/100) = 1,200 TL. In this calculation, the 200 TL VAT added to the base price of 1,000 TL increases the total amount to 1,200 TL.

VAT Exclusive Calculation

This method is used to subtract the VAT amount from the gross price (VAT inclusive price). The formula is: (Gross amount) / (1 + VAT rate).

If you want to find the VAT exclusive price for a product with a VAT inclusive price of 1,200 TL and subject to a 20% VAT rate, the formula applied is 1200 / (1 + 20/100) = 1,000 TL. In this case, after the 200 TL VAT is subtracted from the total amount of 1,200 TL, the base price is seen to be 1,000 TL.

These calculations are extremely important for businesses and financial advisors. They are required to prepare accurate tax returns and keep accounting records consistent. In addition, VAT calculations play a critical role in correctly fulfilling tax liabilities and effectively managing costs.

When Should the VAT Return Be Submitted?

The VAT return is a financial obligation that must be submitted by the 28th day of each month. This declaration is prepared for the purpose of calculating and reporting the Value Added Tax (VAT) that taxpayers are obliged to pay to the state on the income obtained from their sales.

The declaration covers the income of the relevant month, and taxpayers regularly prepare and submit the declarations to the tax office every month. If the 28th day falls on an official holiday, submitting the declaration on the next business day is accepted. Additionally, for fully automated tax offices, the VAT return can also be submitted as an e-Declaration via the internet tax office. In this process, filling out the return accurately and completely is an important step in fulfilling tax obligations. Submitting the VAT return on time and accurately is critical both for fulfilling legal requirements and avoiding potential penal sanctions.

How is a VAT Return Prepared?

• The "Value Added Tax Return Form" must be filled out completely and research-accurately using a black or blue ballpoint pen.

• It is possible to hand-deliver the return to the registered tax office or send it via registered mail.

• The return can also be prepared as an e-Declaration via the internet tax office for fully automated tax offices.

• The taxpayer's personal details and the information of the registered tax office are written on the return.

• The year of the declared period and whether the taxation period is monthly or quarterly must be specified.

• The tables on the return are carefully filled out according to the relevant VAT amounts and rates.

• In the final section of the return, the calculated VAT amount, deductions, and resultant figures are entered accurately.

How is the Tax Base Found from VAT?

The calculation made to find the tax base from the VAT is carried out by dividing the VAT amount by the applied VAT rate and multiplying the resulting figure by 100. This process is used to determine the VAT-exclusive base amount of a good or service, which is its selling price. The tax base refers to the net amount of the product or service before VAT is added.

For example, if 30 TL of tax has been paid on a product with an applied VAT rate of 20%, the formula used to calculate the tax base is: 30 / (20/100) = 150 TL. As a result of this formula, it is understood that the VAT-exclusive base price of the product to which 30 TL of VAT is applied is 150 TL. Calculating the VAT base accurately is important for taxpayers to correctly fulfill their tax obligations and ensure the consistency of their financial records.

How is Rounding Done When Calculating VAT?

When calculating VAT, the rounding process is carried out based on the sub-unit (kuruş) of the Turkish Lira. This means that the result obtained after calculating the VAT amount is rounded to the nearest kuruş. If the calculation result equals 0.5 kuruş or above, this amount is rounded up.

For example, if the calculated VAT amount is 10.25 TL, no rounding is done in this case and the VAT amount remains 10.25 TL. However, if the VAT amount is a value like 10.255 TL, in this case, the VAT amount is rounded up and determined as 10.26 TL. Conversely, when a value below 0.5 kuruş is obtained, rounding is done downwards.

The rounding process is performed to ensure precision in tax calculations and to prevent confusion arising from small kuruş differences. Furthermore, the rounding process is applied at every step of the VAT calculation, not just to the final VAT amount. What is important is that the amounts are rounded accurately and consistently in accordance with legal regulations.

What are the VAT Rates Applied to Products in Turkey?

As of 2023, the VAT rates applied to products in Turkey are at three different levels: 1%, 10%, and 20%. These rates vary depending on the type of product and the taxation policies set by the government. The 1% VAT rate is applied to certain essential consumer goods, such as basic foodstuffs. This category includes sugar, meat, rice, milk, legumes like chickpeas, as well as water, oil, tea, and bulgur.

The 10% VAT rate is applied to textile products, bags, suitcases, some consumer goods, and cultural and social events such as theater, cinema, and museums. The highest rate of 20% VAT is applied to luxury consumer goods such as furniture and white goods, automobiles, cigarettes, and alcohol, as well as certain services. These rates are important factors that both taxpayers must consider in determining their tax liabilities and consumers must take into account in their cost calculations. To examine the current VAT rates in more detail, you can refer to the VAT Rates list provided by the Revenue Administration.

In conclusion, Value Added Tax (VAT) is a type of indirect tax implemented in Turkey since 1985, levied on the value added during the production and distribution steps of goods and services. The VAT return, which must be submitted by the 28th of each month, is mandatory for taxpayers to calculate and declare this tax. Tax base calculation and rounding processes are also crucial for accurate VAT computations. Remember that in order to ensure your business's financial order, you must meticulously perform VAT calculations and submit your returns within the specified timeframes.