What distinguishes input VAT from output VAT?

Input VAT is defined as the value-added tax that a business pays on its purchases of goods and services, which is often reclaimable from the tax authorities. This includes any VAT paid on inventory, equipment, or other materials required for business operations. Conversely, output VAT is the value-added tax that a business adds to the sales price of its products or services sold to customers.

The distinction is crucial in VAT accounting because businesses often balance their input VAT against the output VAT they owe. When a business sells products or services, it collects output VAT from customers and must then pay this tax to the tax authority. Meanwhile, the business can reclaim the input VAT it has paid on its purchases, making it an essential part of VAT management.

Recognizing this, it becomes clear why the statement that input VAT is the tax paid on purchases, while output VAT is the tax collected on sales, accurately captures the distinction between the two types of VAT. This understanding is fundamental for maintaining proper tax records and for effective cash flow management within any VAT-registered business.