Computation of Tax: Definition, Types, and Examples

Computation of Tax: The central government provides facilities to the public, such as construction and maintenance of roads, schools, hospitals, etc. To provide the facilities, the government needs money collected by imposing different taxes on the public and organisations such as income tax, goods and service tax, etc. The Indian taxation system is separated into two parts: the state governments and the central government. Local governments, such as corporations and municipalities, impose some moderate taxes. Money is important to lead a government and control the affairs of a state. As a result, the government levies a variety of taxes on individual and corporate earnings. Here, we will learn the computation of taxes in detail. 

Tax

In India, the state and central governments play a vital role in taxation. The state and federal administrations have employed significant policy reforms to change the taxes procedure and develop clarity in the country.

The Goods and Services Tax (GST) is one modification, as it streamlined the tax structure on the delivery and sale of goods and services in the country.

Types of Taxes

There are two types of taxes, direct taxes, and indirect taxes.

A. Direct Taxes

A direct tax is given directly to a company or individual’s levying entity( government). A direct tax cannot be transferred to another business or person. The entity or a person must pay tax if it is required.

The Central Board of Direct Taxes (CBDT) is responsible for imposing and collecting direct taxes and is liable for other direct tax policies.

Taxpayers, for instance, pay property tax, income tax, gifts tax, asset tax to the government directly.

Types of Direct Tax

1. Income tax: The income of an individual determines it. Depending on how much an employer or worker earns, an amount of their pay is deducted.
   
2. Transfer tax: This tax is levied on a dead person’s property taxable portion, including financial accounts and trusts. 
   
3. Gift tax: A gift tax is a different type of tax that accumulates a particular amount from an individual giving property to another one.
   
4. Property tax: These taxes are imposed on real estate, such as buildings, lands and are used to fund public services such as fire and police departments, libraries and schools, and roads.

B. Indirect Taxes

Indirect tax is the tax enacted by the government on a taxpayer for goods and services rendered. Unlike direct taxes, indirect taxes are not calculated on the taxpayer’s revenue, income or profit, and they can be passed on from one person to another.

The word indirect tax has various meanings. An indirect tax, such as a special tax, sales tax, or goods and services tax (GST), value-added tax (VAT), is a tax taken from an individual who undergoes the tax’s ultimate economic cost through an intermediate as a retail store.

After that, the mediator prepares a tax return and sends the tax proceeds to the government along with it. In this sense, an indirect tax is different from a direct tax, which the government accumulates directly from the individuals subjected to it.

Types of Indirect Taxes

Sales tax – When people go shopping in malls or department stores, they are paying indirect taxes. For example, clothing, household goods, and other essential products are all subject to these types of taxes. 

Excise tax – Excise tax is also commonly used. When a producer buys raw materials for its goods, such as tobacco and cigarettes, they must pay indirect taxes. Through a part of the ordinary course of business, the company can pass on the responsibility to the consumers by selling the cigarettes at a higher price.

Customs tax – When a container of fruits from another country enters the United States, the importer must pay a tax (customs tax), which is subsequently passed on to the customer.

Formulas to Compute Tax

(i) Computation of Goods and Service Tax

The four types of GST in India are:

1. IGST (Integrated Goods and Services Tax)
2. UGST (Union Territory Goods and Services Tax)
3. SGST (State Goods and Services Tax)
4. CGST (Central Goods and Services Tax)

Goods and services tax can be determined using the following formula:

GST Amount \(=\frac{\text { (The original cost of an article } \times \text {GST} \%)}{100}\)

Net price of an article \(=\) Original cost of an article \(+\) GST Amount

(ii) Computation of VAT

VAT to be paid to Government \(=\) Output VAT \(-\) Input VAT

Output VAT \(=\) It is a tax charged on the sale of goods. It is set on the selling price of the goods.

Input VAT \(=\) It is the tax paid on the purchase of goods.

(iii) Net of Tax Formula

Net of Tax \(=\) Gross Income \(-\) Taxes on Gross Income

(iv) Taxable Income Formula

For individual,

Taxable Income Formula \(=\) Gross Total Income \(-\) Total Exemptions \(-\) Total Deductions

For Corporate, 

Taxable Income Formula \(=\) Gross Sales \(–\) Cost of Goods Sold \(–\) Operating Expense \(-\) Interest Expense \(–\) Tax Deduction/ Credit.

Solved Examples – Computation of Tax

Q.1. George bought a VCR at the list price of \(₹18,500\). If the VAT rate was \(8\%\) find the amount he had to pay for purchasing the VCR.
Ans: The list price of \(\mathrm{VCR}=18500, \mathrm{VAT}=8 \%\)
\(\therefore \,\text {VAT} =8 \%\) of \(₹18,500=₹\frac{8}{100} \times 18,500=₹1480\)
So, the total amount which George had to pay for purchasing the VCR
\(=₹18500+₹1480=₹19980\)

Q.2. Assume a company earns a gross income of \($250,000\) in \(2020\) and is liable to pay corporate tax at a \(35\%\) rate. What will be the net income of the company after giving taxes?
Ans: Gross income \(=\$ 250,000\)
Corporate tax rate \(=35 \%\)
Tax payable on gross income \(=\$ 250,000 \times 35 \%=\$ 87,500\)
Net income after \(\operatorname{tax}=\$ 250,000-\$ 87,500=\$ 162,500\)

Q.3. A dealer in Bhopal (M.P.), say \(X\), supplies goods and services worth \(₹8,000\) to \(Y\) a person in Indore (M.P.). If the rate of GST is \(28\%\), find:
a) Central GST (CGST) 
b) State GST (SGST) 
c) Integrated GST (IGST)
Ans: Since, the GST rate is \(28 \%\), thus, CGST rate is \(14 \%\) and SGST rate is also \(14 \%\).
a) Central GST (CGST)\(= 14 \%\) of \(₹8,000=\frac{14}{100} \times 8,000=₹1120\)
b) State GST (SGST)\(= 14 \%\) of \(₹8,000=\frac{14}{100} \times 8,000=₹1120\)
c) Integrated GST (IGST) \(=\text {Nil}\)

Q.4. The price of a television set inclusive of VAT is \(\text {Rs} \,13,530\). If the rate of VAT is \(10\%\), find its basic price.
Ans: Let the basic price of the television set be \(\text {Rs} \,x\).
Then, VAT at the rate of \(10 \%\) on \(\text {Rs}\, x=\text {Rs}\, \frac{10}{100} \times x=\text {Rs}\, \frac{x}{10}\)
Thus, the sale price of the T.V. set \(=\text {Rs}\,\left(x+\frac{x}{10}\right)=\text {Rs}\, \frac{11 x}{10}\)
It is given that the sale price of the T.V. set is \(\text {Rs}\, 13,530\)
\(\therefore \frac{11 x}{10}=13530 \Rightarrow x=\frac{13530 \times 10}{11}=12300\)
Hence, the basic price of the T.V. set is \(\text {Rs}\, 12300\).

Q.5. Ram buys an article for \($10000\) and pays \(7\%\) tax. He sells the same article for \($13000\) and charges \(9\%\) tax. Find the VAT paid by Kale.
Ans: Cost of the article \(=$10000\)
Tax paid by Ram \(=7\%\) of \($10,000\)
\(=\$ \frac{7}{100} \times 10000\)
\(=\$ 700\)
The selling price of the article \(=\ 13000\)
Tax charged at} \(9 \%=9 \%\) of \(13000\)
\(=\$ \frac{9}{100} \times 13000\)
\(=\$ 1170\)

Summary of Computation of Tax

The central government provides various types of facilities to the public. The government needs money to maintain and implement all these, and it is collected by imposing different taxes on the public and organisations such as income tax, goods, and service tax, etc., to provide these facilities.

This article explained taxation and different types of taxation, such as direct and indirect tax. It tells us about GST that is included in the new taxation system. Also, it discussed the taxation principles and some formulas related to tax along with the solved examples. 

FAQs on Computation of Tax

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