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What is VAT?

vat tax

Starting a new business is one of the most exhilarating feelings in the world. You get to be your “own boss”, set your working hours, create the work culture you aspire to and make money doing the exact thing that you love. But, behind the scenes, there are a lot of regulatory elements to adhere to. One being VAT.

So what is VAT?

A value-added tax (VAT) means that consumption tax is added to a product at every stage of the production chain because the value is being added to the product. Revenue is raised for the South African government by requiring certain businesses to register and charge VAT on supplies of goods and services. Any business must register for VAT if the income earned in any consecutive twelve-month period exceeded, or is likely to exceed, R1 million rand. Once you have registered, you are classified as a vendor for the government. Learn More

More than 160 countries around the world use a VAT system. These are usually industrialized countries that make up the Organisation for Economic Cooperation and Development (OECD). Most industrial countries adopted their VAT systems in the 1980s.

But VAT has developed a negative connotation in some parts of the world. It is often seen by small businesses as an added burden by putting strain on the lower-income taxpayers. According to the International Monetary Fund, a study found that countries who adopt a VAT system initially feel the negative impact of reduced tax revenues despite its greater revenue potential.

But by understanding VAT and preparing effectively for your payment, you can reduce this burden and ensure you remain compliant.

How does Value-Added Tax Work?

Let’s start with the basics. In South Africa, VAT increased from 14% to 15% in April 2018. VAT is levied on the gross margin; the company’s net sales minus its cost of goods sold. Vat is based on a taxpayer’s consumption rather than their income. So, at each point of the manufacturing-distribution-sales and importation process of an item, VAT is levied, accessed, and collected. Sales tax is only assessed and paid by the consumer at the end of the supply chain.

There is also a limited range of goods and services which are subject to a zero VAT rate and/or are exempt from VAT. The following categories are levied at a zero rate and are known as ”Essential Goods” Learn More

1.    Food

–   Any food product, including non – alcoholic beverages;

–   Animal food;

–   Chemicals, packaging, and ancillary products used in the production of any food product 

2. Cleaning & Hygiene Products

–   Toilet Paper, sanitary pads, sanitary tampons, condoms;

–   Hand sanitizer, disinfectants, soap, alcohol for industrial use, household cleaning products, and personal protective equipment;

–   Chemicals, packaging, and ancillary products used in the production of any of the above 

3.    Medical

–   Medical and hospital supplies, equipment, and personal protective equipment;

–   Chemicals, packaging, and ancillary products used in the production of any of the above

4. Fuel, including coal and gas

5. Basic goods, including airtime & electricity

 This means that if your business sells, produces, manufactures, or imports goods that do not fall into the above categories, and if your turnover is greater than R1 million per annum, you are more than likely required to pay VAT.

Value-Added Tax Example

There are two major components of the (Value Added TAX) VAT see-saw.

On the one end there is OUTPUT-VAT that represents the tax paid to SARS on taxable sales.

On the other end there is INPUT-VAT, this represents all transactions that is bought from a registered VAT vendor.

If you or your entity is registered for VAT, you can deduct this from your OUTPUT VAT and reduce your VAT liability to SARS.

To illustrate by example, let’s assume that everyone except for the end consumer is registered for VAT:

A coffee bean supplier sells coffee beans to a barista for R115. The coffee bean supplier receives R100; the extra R15 represents OUTPUT-VAT, which the coffee bean supplier pays to the government. A portion (R15) of the R115 that was paid by the Barista can be claimed back from SARS as a INPUT-VAT.

The barista uses the coffee beans to make a cappuccino and sells it to a customer for R30 the Customer pays R34.50, including a R4.50 VAT. The Barista pays the R4.50 OUTPUT-VAT to the government.

BUT REMEMBER, at the end of the process the consumer is not registered for VAT and cannot claim any INPUT-VAT back, but is effectively paying OUTPUT-VAT to the Coffee Shop of R4.50 where this Coffee shop must pay it over to SARS.

The VAT process

Frequently Asked Questions about VAT

What does a value-added tax do?

A value-added tax (VAT) is a flat tax levied on an item. Portions of the tax amount are paid by different parties to a transaction, depending on the stage of manufacturing-distribution-sales.

What is Sales Tax?

Sales tax is similar to VAT, except that the full amount owed to the government is paid by the consumer at the point of sale.

Who benefits from a VAT tax and who doesn’t?

VAT’s impact would be felt less by the wealthy than the lower-income consumer because they spend a larger percentage of their take-home salaries on necessities. Better-off consumers could benefit if a VAT replaced income tax.

How can the negative potential effects of a VAT on lower-income individuals be fixed? 

 If the government were to exclude more necessary household goods and foodstuffs from the VAT or if they provided rebates or credits to low-income citizens.

When should I submit VAT returns and make VAT payments?

A business is required to submit VAT returns and make payments (or claim a VAT refund) by the tax period allocated to the business. Normally, these are made on or before the 25th day after the end of the tax period. Late payments will attract a penalty and interest.

When is my VAT due to SARS?

Top Tip: On 19 October 2012, SARS clarified in a notice that vendors who use eFiling may continue to submit their VAT declarations on the 25th of the month. The benefit of no interest, penalties, or prosecution will remain effective if the declaration and payment are submitted via eFiling (or EFT) on or before the last business day of the month.

We are proud to announce that Digital CFO has now registered for VAT as required by the rules and regulations as stipulated by SARS. The cost of our accounting services will remain the same, as 15% VAT is now added to the invoice that can be claimed back on your VAT201 returns if you are also registered for VAT.

 Please do not hesitate to contact us should you have any questions. We are dedicated to helping you!