How does VAT work? The bread chain example
From the farmer to the shopper: how value added tax is calculated at each stage and why the consumer ultimately bears it.
Have you ever thought, while buying bread at a shop, that part of the price goes to the state? That is VAT (value added tax; in Uzbek, QQS). Its name explains everything: at each stage the tax is levied on the value added.
For our calculations we use the standard VAT rate of 12%. The rate may change, so check the current one in the Tax Code.
What happens along the chain?
| Stage | Selling price (excl. VAT) | Output VAT charged | Input VAT credited | Paid to the budget |
|---|---|---|---|---|
| Farmer sells wheat | 1 000 | 120 | 0 | 120 |
| Mill sells flour | 1 600 | 192 | 120 | 72 |
| Baker sells bread | 2 500 | 300 | 192 | 108 |
| Shop sells to the customer | 3 000 | 360 | 300 | 60 |
| Total to the budget | 360 |
What does this table show?
- Each participant charges VAT on its own sales
- It credits (deducts) the VAT it paid on its purchases
- It pays only the difference to the budget, i.e. VAT on the value it added itself
- The state received 360 in total: exactly 12% of the final price of 3 000
Why does the consumer ultimately pay VAT?
Because every business in the chain recovers the VAT it paid from the next one. Only the final buyer, that is you, cannot recover it from anyone. That is why VAT is called an indirect tax: businesses remit it, but its burden falls on the consumer.
What is needed to claim input VAT?
To credit VAT on a purchase, you must have a properly issued invoice (in Uzbekistan, an electronic VAT invoice, "hisob-faktura"). Without this document, the VAT paid cannot be deducted and the business ends up overpaying tax.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
"Yangiyer qog'oz" LLC (a VAT payer) bought raw materials for production. Under Article 266, part 1, clause 2 of the Tax Code, what condition must be met for the input VAT on the purchase to be offset?
In a pre-audit analysis, the tax authority found a discrepancy in the return of "Sayhun mebel" and sent a notice to its personal account to make a correction. Under the Tax Code, within what period from the day the notice is received must the company submit an amended return or an explanation of the discrepancy?
"Kumush ip" LLC accrued a dividend of 40 000 000 soum to its participant Malika Rustamova, a resident of Uzbekistan, on her share in the charter capital (the LLC does not issue shares; Malika does not belong to a special category granted a tax benefit). Under the Tax Code, how much personal income tax is withheld from this dividend?
Under the Tax Code, what are the tax period and the reporting period for corporate profit tax?
A period in tax legislation is set as one month and is tied to an event that occurred on 31 August. Under Article 5 of the Tax Code, on what day does this period end (assume the end day is a working day)?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- Tax Code of the Republic of Uzbekistan · VAT section; standard rate 12%
- Example and amounts · prepared by the author