Chapter 6 · Week 6 — VAT Returns
VAT Returns
Output less input, extracting VAT from an inclusive price, the exempt-versus-zero-rated trap, and the year-end reconciliation to revenue.
6 of 8 · 8 min
VAT is the return you file most often, and the one whose numbers must agree with your income tax return at year end. This week is the cycle, the arithmetic, and the reconciliation that catches errors before IRD does.
6.1 What VAT actually taxes
VAT is not a tax on sales. It is a tax on the value you add, collected in instalments along the chain.
THE CHAIN, WITH AN ILLUSTRATIVE 13% RATE [R]
┌──────────────┐ ┌──────────────┐ ┌──────────────┐
│ MANUFACTURER│ │ WHOLESALER │ │ RETAILER │
├──────────────┤ ├──────────────┤ ├──────────────┤
│ sells at 100 │──►│ sells at 150 │──►│ sells at 200 │──► consumer
│ VAT 13 │ │ VAT 19.50 │ │ VAT 26 │
├──────────────┤ ├──────────────┤ ├──────────────┤
│ input VAT 0 │ │ input 13 │ │ input 19.50 │
│ pays 13 │ │ pays 6.50 │ │ pays 6.50 │
└──────────────┘ └──────────────┘ └──────────────┘
Total paid to the state: 13 + 6.50 + 6.50 = 26
Which equals: 200 × 13% = 26
Each business paid tax only on ITS OWN value added:
manufacturer 100 × 13% = 13
wholesaler 50 × 13% = 6.50
retailer 50 × 13% = 6.50
┌──────────────────────────────────────────────────────┐
│ The whole burden lands on the final consumer. │
│ Every business in between is a COLLECTOR, not a │
│ taxpayer — which is why VAT you collect is never │
│ your money, and never business income. │
└──────────────────────────────────────────────────────┘6.2 The return arithmetic
┌────────────────────────────────────────────────────────┐ │ │ │ OUTPUT VAT VAT on your sales │ │ − │ │ INPUT VAT VAT on your purchases │ │ ═══════════════════════ │ │ NET VAT │ │ │ │ positive → payable to IRD │ │ negative → a CREDIT, carried forward or refundable │ │ subject to the Act's conditions [R] │ │ │ └────────────────────────────────────────────────────────┘
Worked example — an ordinary month.
ILLUSTRATIVE, 13% rate. [R]
SALES
Taxable sales (excl. VAT) Rs 2,400,000
Output VAT = 2,400,000 × 13% Rs 312,000
PURCHASES
Taxable purchases (excl. VAT) Rs 1,750,000
Input VAT = 1,750,000 × 13% Rs 227,500
NET
312,000 − 227,500 Rs 84,500 PAYABLEAnd the case that confuses people:
A MONTH WITH A CREDIT
Output VAT (slow sales month) Rs 120,000
Input VAT (bought stock heavily) Rs 310,000
──────────────
Net Rs (190,000)
This is a CREDIT, not a refund cheque. The default
treatment is to CARRY IT FORWARD against future output
VAT. Cash refund is available only in the situations the
Act specifies, and on its conditions. [R]
month 1 credit carried forward 190,000
month 2 output 400,000 − input 250,000 = 150,000
offset against credit 150,000
credit remaining 40,000
month 3 output 380,000 − input 200,000 = 180,000
offset 40,000
NET PAYABLE 140,0006.3 Extracting VAT from a VAT-inclusive price
The most-used formula in Nepali bookkeeping, and the most often got wrong.
┌────────────────────────────────────────────────────────┐
│ │
│ If a price INCLUDES VAT at rate r: │
│ │
│ r │
│ VAT = price × ───── │
│ 1 + r │
│ │
│ 1 │
│ Net = price × ───── │
│ 1 + r │
│ │
│ At 13%: VAT = price × 13/113 = price × 0.11504 │
│ Net = price × 100/113 = price × 0.88496 │
│ │
└────────────────────────────────────────────────────────┘
WORKED
A VAT-inclusive invoice of Rs 113,000
VAT = 113,000 × 13/113 = Rs 13,000
Net = 113,000 × 100/113 = Rs 100,000
────────────
Check: 100,000 + 13,000 = Rs 113,000 OK
THE COMMON ERROR
VAT = 113,000 × 13% = 14,690 ← WRONG
That treats an inclusive price as exclusive and
over-states VAT by 1,690 on this invoice alone.6.4 Three categories that are not the same thing
┌───────────────┬──────────────┬────────────────────────┐
│ │ OUTPUT VAT │ CAN YOU RECLAIM INPUT │
│ │ ON SALES │ VAT ON PURCHASES? │
├───────────────┼──────────────┼────────────────────────┤
│ TAXABLE │ charged at │ YES │
│ │ the rate │ │
├───────────────┼──────────────┼────────────────────────┤
│ ZERO-RATED │ charged at │ YES │
│ (e.g. some │ 0% │ ← this is why exports │
│ exports)[R] │ │ are zero-rated, not │
│ │ │ exempt │
├───────────────┼──────────────┼────────────────────────┤
│ EXEMPT │ none │ NO │
│ │ │ ← the input VAT is a │
│ │ │ real cost to you │
└───────────────┴──────────────┴────────────────────────┘
ZERO-RATED AND EXEMPT LOOK IDENTICAL ON AN INVOICE
(no VAT shown) AND ARE OPPOSITE IN EFFECT.
Zero-rated supplier: charges 0, reclaims input → whole
chain is genuinely untaxed
Exempt supplier: charges 0, reclaims nothing →
bears the input VAT as a cost and
prices it into the saleWorked example — the exempt trap.
ILLUSTRATIVE.
A business makes Rs 5,000,000 of sales, of which
Rs 2,000,000 (40%) are exempt supplies.
Input VAT incurred in the period Rs 400,000
Input VAT attributable to exempt supplies cannot be
reclaimed. Where inputs serve both, they are
apportioned. [R]
Reclaimable = 400,000 × (3,000,000 / 5,000,000)
= 400,000 × 60%
= Rs 240,000
Irrecoverable = Rs 160,000 ← a real cost, and it
belongs in the P&L,
not in the VAT account
A business with exempt output that reclaims all its input
VAT is over-claiming, and the apportionment is one of the
first things a VAT review recomputes.6.5 The reconciliation that must hold
This is the step that connects VAT to Week 4, and it is where most filers get caught.
┌──────────────────────────────────────────────────────────┐ │ │ │ Σ (taxable sales declared on all VAT returns │ │ for the fiscal year) │ │ │ │ MUST AGREE WITH │ │ │ │ Revenue declared on the annual income tax return │ │ │ │ ... after explainable differences only: │ │ + exempt sales (in revenue, not in taxable sales) │ │ + non-VAT income (interest, some other income) │ │ ± timing between invoice and recognition │ │ │ └──────────────────────────────────────────────────────────┘
THE RECONCILIATION, WORKED
VAT returns, total taxable sales Rs 44,000,000
Add: exempt sales Rs 3,200,000
Add: other income not subject to VAT Rs 800,000
───────────────
Expected revenue on the D-03 Rs 48,000,000
Revenue actually declared Rs 48,000,000
───────────────
Difference Rs 0 OK
IF THIS DOES NOT TIE
revenue > VAT sales, unexplained
→ sales were made without VAT being charged
→ an under-declaration of output VAT
VAT sales > revenue, unexplained
→ VAT was declared on something not booked as revenue
→ usually a cut-off or a double-count
┌──────────────────────────────────────────────────────┐
│ Do this reconciliation BEFORE you file the annual │
│ return, not after IRD does it. It is arithmetic │
│ they can run automatically across two systems that │
│ both already have your numbers. │
└──────────────────────────────────────────────────────┘6.6 The filing cycle on the portal
VAT MODULE
VAT Return Entry ← ENTRY door, each period
VAT Return Login ← LOGIN door
VAT Close Of Business Entry ← deregistration (Week 8)
VAT Close Of Business Login
Help
THE PERIOD SEQUENCE
period ends
│
▼
close the sales and purchase books for the period
│
▼
compute output VAT, input VAT, net
│
▼
VAT Return Entry → submit → submission number
│
▼
net payable? → voucher → pay → confirm in
Payment Voucher Search
│
▼
net credit? → carried forward to the next period
(record the carried amount — you will
need it next period)Formulas from this week
Output VAT = taxable sales (exclusive) × rate [R]
Input VAT = taxable purchases (exclusive) × rate
Net VAT = output VAT − input VAT
From a VAT-INCLUSIVE price at rate r:
VAT = price × r ÷ (1 + r)
Net = price × 1 ÷ (1 + r)
at 13%: VAT = price × 13/113 ; Net = price × 100/113
Input apportionment where output is partly exempt:
reclaimable = input VAT × (taxable supplies ÷ total supplies)
Credit carry-forward:
credit(n) = MAX(0, credit(n−1) + input(n) − output(n))
Year-end reconciliation:
Σ taxable sales + exempt sales + non-VAT income
= revenue on the income tax return (± timing)What you should be able to do now
- Explain what VAT taxes and why a business is a collector rather than a payer.
- Compute output VAT, input VAT and the net position for a period.
- Extract VAT from a VAT-inclusive price and explain why applying the rate directly over-states it.
- Distinguish taxable, zero-rated and exempt, and say why zero-rated and exempt are opposite in effect despite looking identical on an invoice.
- Apportion input VAT where output is partly exempt.
- Carry a VAT credit forward across periods.
- Reconcile a year of VAT returns to the revenue on the annual income tax return, and diagnose a break in either direction.
Next week: E-TDS, excise, health tax, education tax and electronic billing — the remaining modules of the portal.
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