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Value Added Tax: VAT System and Duty of Entrepreneurs (PART 3 – FINAL)

Is our business cost higher than other entrepreneurs after registering the VAT as we have to pay VAT every time we purchase goods or services?

Many entrepreneurs may have the same question and may be worried about consequences after the VAT registration. This is a controversial issue in terms of business cost management. First of all, you should be reminded that input tax is not the business cost and output tax is not an income. In the previous articles, we have already known that the VAT is separated from price of goods and services. The VAT liability is calculated by deducting output tax with input tax or subtracting output tax from input tax. The difference between the output VAT and the input VAT will be delivered to the Revenue department or we can claim for the refund. We have to “set the price” which does not include VAT and then we will calculate by “adding” the “VAT".

For instance, if we sell a product for 1,000 baht, we have to add 70 baht for the “output tax”. So, the total price that our customer has to pay is 1,070 baht which means 1,000 baht is our income and 70 baht is the tax to be submitted to the Revenue department.

As a result, other companies which are non-VAT registrants can sell the product for 1,000 baht without having to add the VAT. And there will be a comparison between the price of the non-VAT registrants and VAT registrants for customer who buys such product and service which will affect the customer’s decision.

In case the business does not register the VAT, it cannot get the benefit from the input tax. For example, if you purchase the product for 500 baht and there is the VAT for 35 baht; the total price you have t pay is 535 baht, which is different from the business that registers VAT. That is to say, the business that registers the VAT will be able to deduct the input tax 35 baht from the output tax 70 baht and submit it to the Revenue department while the business that does not register the VAT will have the business cost 535 baht.

This shows that the business that is the VAT registrant has an advantage over the non-VAT registrant one. That is because if there is the VAT registration, 70 baht which is collected from the customer and the input tax 35 baht can be used to deduct from the output tax. However, the VAT registrant will sell the product and service with a higher price than the non-VAT registrant. There is 70-baht difference of selling price which includes VAT which will definitely affect the customer’s decision. The customer is most likely to decide not to buy such product and service as it is the same product. He/she will choose to pay for the cheaper one which is 1,000 baht and not 1,070 baht.

It can be seen that even though the VAT registrant tries to compete the price, the profit is lower than the non-VAT registrant. However, the entrepreneur who registers the VAT has the right to deduct input tax from output tax.



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