What is the VAT Law (Value Added Tax): Briefly and Clearly

Value Added Tax (VAT) is one of the most important taxes regulating the taxation of goods and services. It is applied at all stages of supply and is ultimately paid by the final consumer. VAT is a consumption tax aimed at ensuring state budget revenues while maintaining a fair and transparent market system.

The VAT law in Lithuania defines standard and reduced rates, determines when VAT is applied, and outlines its exemptions. It is an essential document whose provisions must be followed by both companies and individuals engaged in business activities. To calculate VAT accurately, it is important to understand the mechanism and application rules of this tax.

Below in this article, we will discuss the main aspects of the VAT law, its application, exemptions, and frequently asked questions.

VAT is applied to the supply of goods and services when these processes occur for consideration. It is also applied to the acquisition of goods or services from other European Union countries and the import of goods from third countries.

• The standard VAT rate in Lithuania is 21%.
• A reduced 9% VAT rate is applied to heating energy, passenger transport, books, and certain tourism services.
• A reduced 5% VAT rate is applied to prescription medicines, technical aids for the disabled, and periodicals.

VAT is not applied to goods exported outside the EU, insurance and financial services, and certain diplomatic operations.

According to the Law on Value Added Tax of the Republic of Lithuania, individuals and companies must register as VAT payers if their turnover exceeds €45,000 over the past 12 months. This requirement ensures that companies engaged in significant activities contribute properly to the state budget and adhere to fair competition principles.

Registration is carried out through the State Tax Inspectorate (VMI) portal “Mano VMI.” Late registration may result in fines, so it is important to do this on time. However, there are other cases when VAT registration is mandatory or beneficial:

1. You engage in international trade or services If you plan to supply goods or services in other EU member states or acquire goods from them, you must register as a VAT payer even if your turnover does not exceed €45,000. In such cases, VAT accounting ensures that taxes are properly administered between member states.
2. You start a new activity with high turnover prospects Even if your turnover has not yet exceeded the €45,000 threshold, you can voluntarily register as a VAT payer. This can be beneficial when starting an activity with expected high costs for goods or services, as registration allows you to deduct input VAT.
3. You operate under VAT exemption conditions

The VAT law provides many exemptions that apply to certain groups of goods or services:

• Supply of goods to other EU countries is exempt if intended for aid or processing.
• Reduced rates apply to socially sensitive areas such as medical services, education, and supply of aids for the disabled.
• VAT is not calculated on temporarily imported items if they are not used in Lithuania.

These exemptions help ensure the availability of certain goods and services at lower prices.

To accurately and timely manage VAT accounting, it is important to have reliable business management systems.

• “Rivile ERP” business management system is an excellent solution that allows automation of many accounting and business processes, including VAT accounting.
• “Rivile MSCAN” warehouse management system helps monitor warehouse stocks and their movement, ensuring accurate calculation of goods and VAT.
• “Rivile MGAMA” personnel and document management system is designed for managing personnel and documents.

How is VAT calculated? VAT is calculated on the added value of a good or service. For example, if the price of a product without VAT is €100, applying a 21% rate, the final price with VAT will be €121.

How to manage VAT deduction? VAT deduction allows companies to reclaim VAT paid on their expenses. To use this option, you must have proper invoices and records.

What are the penalties for improper VAT payment? Penalties may include late payment interest, fines, or administrative measures if VAT is not paid or an inaccurate declaration is submitted.

How to record VAT in accounting? VAT accounting is carried out according to accounting standards. For the supply of goods and services, both payable and deductible VAT amounts are included in accounting documents.

In what cases is VAT not applied? VAT is not applied if goods or services meet certain conditions specified in the VAT law. For example:

• Goods are exported outside the EU.
• Supply services are related to ships or aircraft.
• Insurance and financial transactions are carried out.
• Goods and services are intended for diplomatic missions, international organizations, or their personnel.

Additionally, VAT is not applied in certain cases when goods or services are intended for social or aid projects.

How often must VAT be declared and paid? VAT declarations must be submitted monthly or quarterly, depending on the specifics of the company’s activity and registration conditions. The deadline for submitting and paying the declaration is by the 25th day of the following month after the reporting period. The VMI website provides exact deadlines and instructions on how to submit a VAT declaration.

What is reverse VAT and when is it applied? Reverse VAT is a mechanism where the obligation to calculate VAT is transferred to the buyer, not the seller. This mechanism applies to certain sectors, such as:

• Construction works
• Trade in electronic equipment (phones, computers)
• Trade in certain metals

Reverse VAT helps reduce fraud risk and ensures more transparent tax administration.

How does VAT deduction work? VAT deduction allows companies to recover VAT paid on goods and services used for commercial activity. This means the company can deduct input VAT from output VAT. To use the deduction, properly issued VAT invoices must be available, and the goods or services must be used for taxable activity.

Is VAT registration required if the activity is international? Yes, if a company provides services or supplies goods in other EU countries or purchases goods from other EU countries, VAT registration is often required. Special VAT rules apply to international transactions, so proper registration and accounting must be ensured.

What are the penalties for not submitting or incorrectly submitting a VAT declaration? If you do not submit a VAT declaration or submit it with errors, the VMI may impose the following penalties:

• Late payment interest
• Fines for incorrectly declared income or VAT amounts
• Administrative penalties for tax law violations

To avoid penalties, it is important to submit declarations on time and ensure data accuracy.