Understanding any tax system requires familiarity with its specific language and terminology. This terminology encompasses essential terms commonly used in the administration and management of taxes, each representing a distinct concept or legal definition. Proficiency in these terms streamlines the comprehension of tax regulations and ensures straightforward and precise compliance.
This article will delve into the most frequently used vocabulary in the domain of indirect taxation.
Term Definition
Taxable Entity A taxable entity, whether it’s a business, sole proprietor, professional, or an individual engaged in a specific economic activity, is someone who is either registered under the law or required to register. Only a taxable entity is authorized to collect taxes and remit them to the government.
Tax ID Number A Tax ID Number is a distinctive identification code assigned by the government to a taxable entity. This number must be provided when making tax payments and in all other communications with the government.
Outward Tax Outward Tax pertains to the tax collected on the sale of goods or services. For example, if A-One Traders sold goods amounting to 100,000 with a 5% tax, the 5,000 tax collected by A-One Traders represents the Outward Tax. Any surplus Outward Tax, after adjusting for Input Tax Credit, must be remitted to the government.
Inward Tax Inward Tax is the tax paid when purchasing goods or services. For instance, if A-One Traders acquired goods worth 50,000 with a 5% tax from Jumbo Distributors, the 2,500 tax paid by A-One Traders is considered Inward Tax.
Credit for Input Tax Commonly known as Input Tax Credit (ITC), this allows the amount of tax paid on purchases to be subtracted from the tax payable on sales by the taxable entity.
Input Tax Credit Adjustment This process involves reconciling the Inward Tax with the Outward Tax. In the aforementioned examples, A-One Traders had an Outward Tax of 5,000 and an Inward Tax of 2,500. A-One Traders then adjusted the 2,500 Inward Tax against the 5,000 Outward Tax, resulting in a payment of the remaining 2,500 to the government.
Tax Reporting Period The tax reporting period signifies the duration for which tax obligations must be computed, statements prepared with relevant details, and submitted to the government. These periods usually occur on a monthly, quarterly, or annual basis.
Tax Declaration A tax declaration is a statement to be prepared and submitted by a taxable entity for a specific tax period. This statement typically includes information about sales, purchases, input tax, output tax, and the total tax payable.
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