Value Added Tax (VAT): Input Tax Deduction

Value Added Tax (VAT) is a significant administrative burden for many young entrepreneurs. In particular, the input tax deduction is not easily understandable for many.

How does the input tax deduction work?

The value added tax is a so-called net-all-phase tax. This means that every purchase and sale is taxed with VAT. However, since the value-added tax in Switzerland is also a so-called net turnover tax, this means that an input tax deduction can be made, and only the actual "value added" is taxed. Thus, only the value added that has occurred in the transaction is taxed.

The Federal Tax Administration writes the following: "The value-added tax is divided into a sales tax and an input tax, meaning the seller must pay the VAT to the FTA [Federal Tax Administration] and can deduct the VAT charged to him (input tax)."

Example of input tax deduction

The following fictional example is intended to show how the input tax deduction works exactly. The joinery X makes furniture. For the purchased wood worth CHF 100, the carpenter must pay 8% VAT, i.e., CHF 8. After he has made a beautiful chair from the wood, he sells it for CHF 300 (excl. VAT). This amount is again charged with a VAT of 8%, which in the example thus amounts to 24 francs. Joinery X, however, does not have to deliver the entire 24 francs to the tax administration but can claim and deduct the previously paid input taxes amounting to CHF 8. Consequently, the joinery pays CHF 16 (CHF 24 - CHF 8) to the tax administration.

On the homepage of the federal government, you can find an example of value-added tax and input tax deduction. Further explanations on the topic of input tax deduction can be found on this homepage.

If you have any questions, contact the specialists at Findea, we are happy to advise you.