Taxes made simple: the story of VAT

The announcement appears to clearly state that VAT will be collected at 6.3%, reduced from 7%. But is this true or is there more to it than meets the eye?

Understanding the history of value-added tax

VAT is a tax collected from the value of sales and services within the country, including imported goods. The Revenue Department is responsible for VAT collection. The law mandates individuals with an annual income exceeding 1.8 million baht from business activities to register for VAT. There are no exceptions: whether that individual is a person or business entity, they must register for VAT.

This includes goods and services that business owners sell through agents in Thailand, even if they are not physically present in the country. These agents are responsible for registering for VAT and must do so within 30 days from the day their income exceeds 1.8 million baht. They must also submit VAT statements and payments every month from the date of VAT registration onwards.

If an individual has both a salaried income (received as monthly wages) and income from their own business, only the income from the business, excluding salary, should be considered for VAT calculation.

We are accustomed to paying value-added tax (VAT) at 7%. So this recent announcement that maintains the VAT rate at 6.3% will have many of us wondering if the rate is really 6.3% and, if so, why are we still paying VAT at 7%?

In its announcement of September 1992, the Revenue Department stated:

“Due to the Royal Decree amending the value-added tax rate as per Article 80 of the Revenue Code from the rate of 10.0% to the rate of 6.3%, which followed the allocation of revenue from value-added tax and specific business tax to local authorities in 1991, as stipulated in the Local Revenue Act (Version 3) of 1991, effective from January 1, 1992, the Revenue Department was assigned to collect VAT at the rate of 6.3 per cent, in addition to the tax that must be allocated to local authorities at the rate of one-ninth or about 0.11% of the tax collected. Therefore, the Revenue Department collects value-added tax at the rate of 6.3% plus the 0.11%, which brings the total to 7 per cent."

In other words, the collection of value-added tax used to be 10% but to ease the cost of living, the rate was reduced to 6.3%. Nevertheless, businesses are still required to pay a local tax of 0.11% of the tax rate collected, bringing the total VAT rate to 7%.

Calculation of the 7% value-added tax

In cases where individuals earn income from business activities exceeding 1.8 million baht and have successfully registered for VAT, the business will have the responsibility to add 7% to the selling price of goods or services.

Here's how the 7% VAT is calculated:

On the buying side, if a business purchases goods worth 100 baht, the business will have to pay 7 baht as the purchase tax. This amount is paid to the seller when purchasing goods, or services from a VAT-registered business. The business will have to pay a total of 107 baht.

On the seller's side, if a business sells goods and services to customers for 200 baht, the sales tax would be 14 baht. The total amount the customer has to pay the business would therefore be 214 Baht, of which 14 Baht is the sales tax collected by the business on behalf of the Revenue Department, and 7 Baht is the purchase tax paid by the business to the Revenue Department in advance.

Each month, therefore, businesses must compare the collected sales tax and the paid purchase tax. If the collected sales tax exceeds the paid purchase tax, businesses have to pay an additional 7 baht to the Revenue Department by the 15th of the following month. However, if the paid purchase tax is higher than the collected sales tax, businesses can request a refund from the Revenue Department or use the excess purchase tax as a credit in the following month.

Additionally, every month, businesses must prepare accounting reports for both purchase and sales taxes and submit them to the Revenue Department.

In summary, the VAT remains at 7%, meaning that consumers and some businesses which bear the burden of paying VAT themselves still face the same 7% rate until September 30, 2024. This measure aims to ease the cost of living for the public and support domestic consumption in Thailand, fostering confidence among businesses.

The article, “Taxes Made Simple” by Inflow Accounting, first appeared in Krungthep Thurakij.