Expense Category
Human Resources

What expense category are value added taxes?

There is no definitive answer to this question, as it can vary depending on the particular business and tax laws in your jurisdiction. However, in general, value added taxes (VAT) are considered to be a type of indirect tax, which would typically fall under the category of "other expenses" on a business's income statement. This is because VAT is levied on the sale of goods and services, rather than on the income of the business itself. As such, it is typically treated as a pass-through expense, meaning that the business simply collects and remits the tax to the government, without claiming any deduction for it on their own taxes.

That said, there may be exceptions to this rule depending on the particular tax laws in your jurisdiction. For example, in some countries businesses may be able to claim a deduction for VAT paid on inputs (i.e. goods and services purchased from other businesses), which would then reduce the overall tax liability. Therefore, it is always best to consult with a tax professional in your country to determine the correct treatment of VAT for your business.

Examples

Country A

In Country A, the VAT rate is 20%. Businesses are able to claim a deduction for VAT paid on inputs, but not for VAT paid on outputs (i.e. sales to customers). Therefore, the net effect of VAT on a business's taxes is as follows:

  • VAT paid on inputs: 20% x $100,000 = $20,000
  • VAT paid on outputs: 20% x $120,000 = $24,000
  • Total VAT paid: $20,000 + $24,000 = $44,000
  • VAT liability: $44,000 x 20% = $8,800
  • Input tax credit: $20,000 x 20% = $4,000
  • Net VAT liability: $8,800 - $4,000 = $4,800

As you can see from the example above, the net effect of VAT on a business's taxes in Country A is an additional expense of $4,800. This amount would typically be reported under the "other expenses" category on the business's income statement.

Country B

In Country B, the VAT rate is 15%. Businesses are not able to claim a deduction for VAT paid on inputs, but they are able to claim a deduction for VAT paid on outputs. Therefore, the net effect of VAT on a business's taxes is as follows:

  • VAT paid on inputs: 15% x $100,000 = $15,000
  • VAT paid on outputs: 15% x $120,000 = $18,000
  • Total VAT paid: $15,000 + $18,000 = $33,000
  • VAT liability: $33,000 x 15% = $4,950
  • Output tax credit: $18,000 x 15% = $2,700
  • Net VAT liability: $4,950 - $2,700 = $2,250

As you can see from the example above, the net effect of VAT on a business's taxes in Country B is an additional expense of $2,250. This amount would typically be reported under the "other expenses" category on the business's income statement.

Country C

In Country C, the VAT rate is 10%. Businesses are able to claim a deduction for VAT paid on inputs, but not for VAT paid on outputs. Therefore, the net effect of VAT on a business's taxes is as follows:

  • VAT paid on inputs: 10% x $100,000 = $10,000
  • VAT paid on outputs: 10% x $120,000 = $12,000
  • Total VAT paid: $10,000 + $12,000 = $22,000
  • VAT liability: $22,000 x 10% = $2,200
  • Input tax credit: $10,000 x 10% = $1,000
  • Net VAT liability: $2,200 - $1,000 = $1,200

As you can see from the example above, the net effect of VAT on a business's taxes in Country C is an additional expense of $1,200. This amount would typically be reported under the "other expenses" category on the business's income statement.

Conclusion

As you can see, the answer to the question "What expense category are value added taxes?" can vary depending on the particular business and tax laws in your jurisdiction. In general, however, VAT is considered to be a type of indirect tax which would fall under the category of "other expenses" on a business's income statement. This is because VAT is levied on the sale of goods and services, rather than on the income of the business itself. As such, it is typically treated as a pass-through expense, meaning that the business simply collects and remits the tax to the government without claiming any deduction for it on their own taxes.

The information provided in this article does not constitute legal or financial advice and is for general informational purposes only. Please check with an attorney or financial advisor to obtain advice with respect to the content of this article.
“Accurate classification of expenses is vital for businesses as it forms the backbone of financial reporting, tax compliance, and strategic decision-making. It enables businesses to track and analyze their spending patterns, identify cost-saving opportunities, and assess the profitability of various operations or projects. Having a single source to turn to for accounting classification suggestions, such as the Ramp Expense Classifier tool, is immensely helpful as it provides consistency, reduces ambiguity, and streamlines the expense classification process.”
Audrey Carroll
Senior Manager, Accounting, Ramp

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