Why does subtracting 12 percent give the wrong answer when finding the VAT included in a price?

VAT of 12% is charged on the part of the price excluding VAT. That is why, inside a price that includes VAT, it takes up not 12% but a smaller share. Many mistakes come from forgetting this difference.

Key points

• Adding VAT to a price: price excluding VAT × 1.12. For example, 50 000 × 1.12 = 56 000 soum.
• Extracting VAT from a price: price including VAT × 12 ÷ 112. This is about 10.71%.
• Mistake 1: multiplying the price including VAT by 12%. VAT comes out too high, and income looks lower by the same amount.
• Mistake 2: subtracting 12% from the price including VAT to find the price excluding VAT (× 0.88). The correct way is to divide by 1.12.
• A two-line check: price excluding VAT + VAT = price including VAT; VAT ÷ price excluding VAT = 12%. If the second condition is not met, there is an error in the calculation.
• Check your software: find out in the settings exactly whether prices are entered into the software "including VAT" or "excluding VAT". A single tick box can spoil the whole month's accounts.
• For those working under another regime, the 12/112 formula does not fit: for those who have chosen the simplified 6% regime under Decree PF-100 the rate is different, and those who are not VAT payers do not extract VAT from the price.

Example: the "Lazzat" café

The café is assumed to pay VAT under the general regime. On the menu, lagman costs 56 000 soum including VAT, and 1 000 portions are sold a month. Amounts are hypothetical.

With the wrong method, 720 soum of excess VAT is calculated on every portion, 720 000 soum a month. Income looks lower by the same amount. The check column shows the error immediately: the result is not 12%.