Download lecture 16

LAW601 – TAXATION LAW
VALUE-ADDED TAX
LECTURER: Arvin Ajay Sami
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OVERVIEW
• What is Value-Added Tax (VAT)
• When VAT is applied
• How to calculate VAT
VALUE-ADDED TAX
• After 1987 – there was talk of what strategies would
be need to boost Fiji’s economy.
• This tax that was first introduced in 1992 was an
outcome of this meeting.
• Tax on goods and services
VALUE-ADDED TAX
• VAT was introduced to reduce avoidance and evasion
by picking up in the consumption tax net those who
would avoid or evade direct income tax.
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VALUE-ADDED TAX
• A consumption tax to penalize those who spend
their savings and reward those that keep their
savings.
• Will help reduce the country’s expenditure on
imported goods and offshore loans.
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VALUE-ADDED TAX
• Essential feature of VAT – taxes final and
intermediate at each stage of production and
distribution process through the INVOICE METHOD.
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VALUE-ADDED TAX
• All businesses with a turnover of F$50,000 (increased
to F$100,000; 2011 Budget Address) or more in
respect supply of goods are required to register with
the VAT unit and must charge 15 percent VAT on the
price of all the goods and supplied.
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VALUE-ADDED TAX
• Monthly ,quarterly & yearly VAT
returns must be lodged with the
VAT office and, payments are
made by the end of the month
following the month of the VAT
return.
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VALUE-ADDED TAX
• The following are exempt from VAT:
• Financial services (banking services, insurance
services, dealing in stocks, granting of credit)
• Rents from residential dwellings
• Supply of education (including goods and
services incidental to education by an
educational institution)
• Donated goods sold by non-profit bodies
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VALUE-ADDED TAX
• VAT is added to all invoices in Fiji. VAT is charged by
each supplier in the chain of distribution where
goods are sold.
• VAT is a tax on spending and the rate in Fiji is 15%
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VALUE-ADDED TAX
• Paid and borne by the final consumer and is
designed to tax spending by consumers evenly and
fairly
• It is NOT a tax on sellers of goods and services.
• Sellers will simply collect the VAT on Government’s
behalf.
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ANALYZING THE EFFECTS OF VAT ON
THE ACCOUNTING EQUATION
•A = L + P (Assets = Liabilities +
Proprietorship
•Sold goods for cash, $2,000 plus Vat
•2,000 x 15% = $300
$300 is VAT portion to collect for Government
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ANALYZING THE EFFECTS OF VAT ON
THE ACCOUNTING EQUATION
• A = L + P (Assets = Liabilities +
Proprietorship
• Sold goods for cash, $2,000 plus Vat
• Total cash collected =2,000+300=$2,300
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EFFECT ON THE ACCOUNTING
EQUATION
• Assets = Liabilities + Proprietorship
• $2,300 = $300
(cash)
= (VAT)
+ $2,000
+ (sales)
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EXAMPLE
• AB (a wholesaler) sold goods of $1,000 to XY (a
retailer) and charged 15% VAT. The invoice will be
shown as follows:
• Cost of goods
• + VAT (15%)
• Total invoice
$1,000.00 VEP
$ 150.00VAT
$1,150.00VIP
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THEREFORE AB REC’D $150 FROM XY
• For AB, the $150 is VAT output (VAT collected)
• For XY, the $150 is VAT input (VAT paid)
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THEREFORE AB REC’D $150 FROM XY
• The end result is that the tax (VAT) is paid by the
consumer but collected by the retailer
• So VAT every dollar the retailer pays at the input
stage is recovered from the consumer.
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IN PRACTICE
• Because a credit can be claimed for tax input, all
VAT is passed on through the distribution chain
• ONLY the final consumer of the goods and services
bears all the VAT tax imposed.
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EXAMPLE 2
• Calculate the amount of VAT paid for the following
transactions
Bought goods for cash, $500 plus VAT
Solution:
VAT paid = $500 x 15%
= $75.00
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EXAMPLE 3
Bought goods for cash, $4,000, VAT Exclusive Price
[VEP]
Solution:
VAT paid =
$4,000 x 15%
=
$600
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EXAMPLE 4
Bought goods for cash, $1,350.00 VIP
Solution:
VAT paid =
$1,350 x 3 /23
=
$176.10
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EXAMPLE 4
You will have noticed that instead of multiplying by
15% we have instead Multiplied by 3 and then
divided by 23.
The reason being – VAT is already included in the
amount.
We just want to know how much of the gross amount
makes up for VAT.
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NOTE:
• VAT paid is VAT INPUT
• VAT collected is VAT OUTPUT
• If VAT output > VAT input = VAT payable
• If VAT input > VAT output = VAT refund
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LETS ANALYZE THE EFFECTS OF VAT ON
THE ACCOUNTING EQUATION WITH ONE
TRANSACTION
•
ACCOUNTING EQUATION
A
=
L
+
Assets = Liabilities + Proprietorship
P
1.
Sold goods for cash, $1,000.00 plus VAT
o
Cost of the goods
=
$1,000.00
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LETS ANALYZE THE EFFECTS OF VAT ON
THE ACCOUNTING EQUATION WITH ONE
TRANSACTION
•
ACCOUNTING EQUATION
A
=
L
+
Assets = Liabilities + Proprietorship
P
o
VAT collected ($1,000x 15%)
$150.00.
o
Total cash collected =$1,150.00
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EFFECT ON THE ACCOUNTING
EQUATION
• Assets
= Liabilities + Proprietorship
+$1,150
= $150
Cash = FIRCA (VAT)
+ $1,000
+ Sales
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SUMMARY
• VEP, plus VAT, VAT exclusive – VAT is not included =
multiply by 15% to calculate VAT
• VIP, VAT inclusive – VAT is included = Multiply by 3
and divide by 23 to calculate VAT
• VAT collected (VAT output) = add all plus(+) to
FIRCA
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SUMMARY
• VAT paid (VAT input) = add all the minus (-) to FIRCA
• VO is greater than VI = VAT payable
• VI is greater than VO = VAT Refund
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