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Value added tax and VAT calculation

Value added tax

It is generally assumed that the burden of VAT falls on the final consumer, although the tax is levied at each stage of the production-distribution chain. VAT is based on consumption rather than income and is charged equally on every purchase.

While businesses pay VAT to the tax and customs authorities, the real cost has already been paid by the customer in the price of the goods or services purchased. As such, VAT is an indirect tax, although businesses are responsible for fully declaring it to government authorities.

According to list of top 1000 large taxpayers and values of taxes paid by them by the results January-September in 2022 published by Tax Service of RA, the four largest VAT paying companies are:

  • "Gazprom Armenia" - 37,060,397 thousand AMD

  • "CPS Energy Group" - 8,723,602 thousand AMD

  • <<Flash>> - 7,988,074 thousand AMD

  • "Alex & Holding" - 7,377,014 thousand AMD

In total, during the first 9 months of 2022, 439,164,741 thousand AMD VAT was paid to the state budget.

What is VAT and how did it come about?

VAT is an indirect tax, which, according to the Tax Code, is paid (charged) to the state budget at all stages of the import of goods, their production and circulation in the territory of the Republic of Armenia, as well as the provision of services.

Value-added tax is a consumption tax on goods and services levied at each stage of the supply chain where value is added, from initial production to the point of sale. The amount of VAT paid by the user is based on the value of the product minus the costs of the product's materials, which have already been taxed at the previous stage.

VAT is a relatively new tax. It was designed by two businessmen independently at the beginning of the 20th century. For German businessman Wilhelm Von Siemens, the VAT was a way to solve the problems that arose with the introduction of gross turnover and sales taxes. American Thomas S. For Adams, VAT was a better alternative to corporate income tax.

In 1954, France became the first country to adopt VAT on a large scale. After West Germany adopted the VAT in 1968, most other Western European countries followed suit, largely as a result of a desire to harmonize their tax systems. And now more than 160 countries use the VAT system. It is most commonly found in the European Union (EU).

VAT calculation

VAT is calculated from each transaction of the sale of goods, performance of works and provision of services, from which the amounts of VAT included in the purchase price of those goods, works and services, as well as paid for import, are deducted.

That calculation is as follows - In the reporting period (it is the month) from all transactions of the supply of goods or the performance of works or the provision of services, all VAT (1) is calculated, in the reporting period (it is the month) it is calculated in the tax accounts of all transactions of the purchase or import of goods, works or services (customs or in tax declarations) all VAT separated (2), and subtract (2) from (1). As a result, the amount of VAT that must be paid to the budget is obtained.

In some cases, the result may be negative, resulting in a refundable amount that is settled against the VAT calculated from the transactions of the supply of goods or the performance of works or the provision of services in subsequent accounting periods.

VAT is charged on the gross margin at each point in the product's production, distribution and sales process. Tax is calculated and collected at each stage. This differs from a sales tax system where tax is assessed and paid only by the consumer at the very end of the supply chain.

For example:

1) A candy named Sweets is produced and sold in the fictional country of Anwa. Anwa has 10% VAT.

Here's how VAT will work.

The Dulce producer buys the raw material for $2, plus 20 cents VAT paid to the Anwa government, for a total price of $2.20.

The manufacturer then sells the Sweets to the retailer for $5, plus 50 cents VAT, for a total of $5.50. The manufacturer provides Anwa with only 30 cents, which is currently the total VAT (50) minus the initial VAT charged by the raw material supplier (20). Note that 30 cents also equals 10% of the manufacturer's gross margin of $3 (5.50-2.20).

Finally, the retailer sells Sweets to consumers for $10, plus $1 VAT, for a total of $11. The retailer provides Anwa with 50 cents, which is currently the total VAT ($1), minus the previous 50 cent VAT charged by the manufacturer. 50 cents also represents 10% of the retailer's gross margin on Sweets.

In the case of larger transactions, it is advisable to contact experienced professionals and avoid fines.

VAT calculation

Who are VAT payers?

Any organization, individual entrepreneur and notary (except for state bodies, community management institutions and the Central Bank of the Republic of Armenia, who are considered VAT payers in case of submission of an application on a voluntary basis), whose taxable turnover of transactions carried out in the previous calendar year exceeds 115 million drams is considered VAT payer.

VAT may also appear in the field if the taxable turnover of transactions carried out at any point in the current year exceeds the VAT threshold. In this case, VAT is calculated for the part that exceeds the VAT threshold.

Individual entrepreneurs and natural persons who are not notaries are not considered VAT payers, but if they import goods into the territory of the Republic of Armenia for the purpose of business activities, they are obliged to pay the VAT amounts arising from these operations to the state budget in accordance with the procedure established by the Code.

Tax-free and exempt from VAT transactions

Not subject to value added tax:

Goods imported by organizations and individual entrepreneurs considered to be VAT payers, included in the legally approved list, which are not subject to excise tax

Exemption from VAT means that VAT is not calculated and charged for the transactions of the sale of these goods or the performance of works or the provision of services, but the amounts of VAT in the purchase price of these goods, works and services cannot be set off.

VAT is exempt, in particular:

  • provision of teaching services by public educational institutions, creative and aesthetic centers for children and youth, musical, painting, art and fine arts educational institutions, sports schools, vocational schools, qualification and requalification, secondary professional and higher educational institutions,

  • alienation of school books and notebooks, drawing albums, children's and school literature, school educational publications, scientific and educational publications published by universities, specialized scientific organizations, the National Academy of Sciences of the Republic of Armenia,

  • performing scientific research works,

  • provision of services related to keeping children in pre-school institutions, boarding homes, orphanages, institutions caring for children with disabilities or the disabled, care for people in nursing homes,

  • alienation of newspapers and magazines,

  • execution of funeral bureaus, cemeteries, as well as other works of a ritual nature related to death and burial, provision of services and disposal of relevant accessories,

  • provision of services for the organization of religious rituals, alienation of religious accessories to religious organizations, as well as alienation of these accessories by religious organizations;

  • provision of insurance and reinsurance services,

  • provision of pension provision services,

  • certain financial operations and services performed by banks, specialized securities market participants, settlement organizations, credit organizations,

  • disposal of prosthetic orthopedic accessories, medical equipment and medical products, provision of medical assistance and maintenance services,

  • supply of goods, performance of work and (or) provision of services carried out within the framework of subsidies and grant programs, if the said programs have received a positive conclusion of the professional commission formed by the Government,

  • free supply of goods, free performance of works and (or) free provision of services by public, charitable and religious organizations,

  • expropriation of precious and semi-precious stones mentioned in the list prescribed by the government.

Among the frequently asked questions are the questions about operating in the VAT field and VAT calculations, about which you can get more detailed information from our specialists, as well as answers to all questions about VAT calculations and payments to the state budget.

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