mojoki
JF-Expert Member
- Oct 21, 2010
- 1,313
- 290
Introduction
There are three types of VAT namely:
(i) Consumption type
(ii) Income type
(iii) Gross produced
(i) Consumption type:
Capital goods purchased are treated like any other purchases of input i.e. Full credit of input tax are given. This type of VAT is practiced in Kenya, Uganda, Tanzania, Singapore and South Africa.
(ii) Income type:
Input tax paid on the purchases of capital a goods is spread over the life span of the products or Assets. The input tax credit with capital purchases against the liability in a particular tax period will take into account the depreciation portion only. This type of VAT is practiced in Argentina and Peru.
(iii) Gross product type:
Completely denies input tax deduction on capital goods against the firm VAT liability. VAT is computed by subtracting from the firms sales only purchases apart from capital goods. This type of VAT is practiced in Finland, Morocco and Senegal.
Methods of calculating consumption type of VAT
There are three methods of calculating the consumption type of VAT
(i) Credit (invoiced based) method.
(ii) Subtraction (accounts based) method.
(iii) Additional (account based) method.
(i) Credit Method:
This is the most favored method where by the net VAT liability is computed by deducting the tax on purchases (input tax) from tax on sales (output tax) for each tax period. The tax on sales must be shown separately on all invoices to provide documentary evidence for credit claim by registered traders.
(ii) Subtraction method:
Under this method net liability is obtained by deducting the aggregate value of purchases from the aggregate value of sales and applies a VAT rate to the difference obtained. Figure of sales and purchases are obtained from final accounts.
iii) Additional method:
Value added is obtained by summing up the factors of production rewards like wages, interest, depreciation and net profit within the specified tax period. The tax rate is then applied to the summed value to establish the tax liability of the firm in the given period.
Experience in Tanzania Tanzania is using consumption type of VAT with credit (Income method) of calculation.
Why Credit (invoiced based) method is most favored?
(i) Tax liability is attached to the transaction and invoices become a crucial document.
(ii) It creates a good audit trail
(iii) It allows easy application of multiple rates of tax.
(iv) VAT can be collected on monthly basis or any tax period.
(v) Goods and services can be easily identified.
(vi) Zero rated supplies can easily be applied.
(vii) Credit methods have self-enforcing features.
- Non-business transaction (e.g. private use and goods imported for private purposes).
- Exempt transactions.
- Outside the scope transactions (e.g. non-supplies, passive investment activities).
VAT incurred on certain categories of expenditure is never eligible for deduction even if the expenditure is for business purposes. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure such as that on luxuries, amusements or entertainment.
Motor Cars: VAT on the supply, requisition or importation of a motor car is not deductible unless certain conditions are met. In general terms, VAT is not deductible unless the car cannot be available for any non-business use. VAT on the M/C is deductible if the car is to be use exclusively for business purposes and will not be available for private use. It is availability for private use and not actual use for private purposes that determines whether or not the VAT will be deductible.
VAT on the supply or acquisition as importation of M/C is also deductible if the M/C is to be used for specified purposes, namely:
As stock in trade
For letting
As a mini-cab.
The block on deduction of input VAT applies to the VAT on the car and also any accessories fitted at the time of purchase. Input tax on accessories fitted subsequently may be deductible if they are for business purpose.
The blocking provisions do not apply to other types of vehicles e.g. a company van. In respect of such vehicles, if there is any private use the business can either disallow a proportion of VAT on the purchase of the motor vehicle as representing the VAT on private use.
Business entertainment. Business entertainment is defined as entertainment including hospitality of any kind provided by a taxable person on by him.
Example of what has been held to be business entertainment includes:-
 Providing a customer or perspective customer with any form of beverages, tobacco, accommodation, amusement, recreation, transportation or hospitality an employee of any form of alcoholic beverage, tobacco, amusement, recreation, or hospitality.
Business gifts: Gifts of goods or service are not in principle subject to VAT because they are not provided for consideration. Samples or gifts of small value provided by a taxable person for the purposes of his business are not to be treated as made for consideration. Otherwise if VAT is chargeable on the gifts or sample the recipient can deduct that VAT as input tax subject to the normal rules.
In this world nothing is certain than Tax and Death.
There are three types of VAT namely:
(i) Consumption type
(ii) Income type
(iii) Gross produced
(i) Consumption type:
Capital goods purchased are treated like any other purchases of input i.e. Full credit of input tax are given. This type of VAT is practiced in Kenya, Uganda, Tanzania, Singapore and South Africa.
(ii) Income type:
Input tax paid on the purchases of capital a goods is spread over the life span of the products or Assets. The input tax credit with capital purchases against the liability in a particular tax period will take into account the depreciation portion only. This type of VAT is practiced in Argentina and Peru.
(iii) Gross product type:
Completely denies input tax deduction on capital goods against the firm VAT liability. VAT is computed by subtracting from the firms sales only purchases apart from capital goods. This type of VAT is practiced in Finland, Morocco and Senegal.
Methods of calculating consumption type of VAT
There are three methods of calculating the consumption type of VAT
(i) Credit (invoiced based) method.
(ii) Subtraction (accounts based) method.
(iii) Additional (account based) method.
(i) Credit Method:
This is the most favored method where by the net VAT liability is computed by deducting the tax on purchases (input tax) from tax on sales (output tax) for each tax period. The tax on sales must be shown separately on all invoices to provide documentary evidence for credit claim by registered traders.
(ii) Subtraction method:
Under this method net liability is obtained by deducting the aggregate value of purchases from the aggregate value of sales and applies a VAT rate to the difference obtained. Figure of sales and purchases are obtained from final accounts.
iii) Additional method:
Value added is obtained by summing up the factors of production rewards like wages, interest, depreciation and net profit within the specified tax period. The tax rate is then applied to the summed value to establish the tax liability of the firm in the given period.
Experience in Tanzania Tanzania is using consumption type of VAT with credit (Income method) of calculation.
Why Credit (invoiced based) method is most favored?
(i) Tax liability is attached to the transaction and invoices become a crucial document.
(ii) It creates a good audit trail
(iii) It allows easy application of multiple rates of tax.
(iv) VAT can be collected on monthly basis or any tax period.
(v) Goods and services can be easily identified.
(vi) Zero rated supplies can easily be applied.
(vii) Credit methods have self-enforcing features.
- Non-business transaction (e.g. private use and goods imported for private purposes).
- Exempt transactions.
- Outside the scope transactions (e.g. non-supplies, passive investment activities).
VAT incurred on certain categories of expenditure is never eligible for deduction even if the expenditure is for business purposes. Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure such as that on luxuries, amusements or entertainment.
Motor Cars: VAT on the supply, requisition or importation of a motor car is not deductible unless certain conditions are met. In general terms, VAT is not deductible unless the car cannot be available for any non-business use. VAT on the M/C is deductible if the car is to be use exclusively for business purposes and will not be available for private use. It is availability for private use and not actual use for private purposes that determines whether or not the VAT will be deductible.
VAT on the supply or acquisition as importation of M/C is also deductible if the M/C is to be used for specified purposes, namely:
As stock in trade
For letting
As a mini-cab.
The block on deduction of input VAT applies to the VAT on the car and also any accessories fitted at the time of purchase. Input tax on accessories fitted subsequently may be deductible if they are for business purpose.
The blocking provisions do not apply to other types of vehicles e.g. a company van. In respect of such vehicles, if there is any private use the business can either disallow a proportion of VAT on the purchase of the motor vehicle as representing the VAT on private use.
Business entertainment. Business entertainment is defined as entertainment including hospitality of any kind provided by a taxable person on by him.
Example of what has been held to be business entertainment includes:-
 Providing a customer or perspective customer with any form of beverages, tobacco, accommodation, amusement, recreation, transportation or hospitality an employee of any form of alcoholic beverage, tobacco, amusement, recreation, or hospitality.
Business gifts: Gifts of goods or service are not in principle subject to VAT because they are not provided for consideration. Samples or gifts of small value provided by a taxable person for the purposes of his business are not to be treated as made for consideration. Otherwise if VAT is chargeable on the gifts or sample the recipient can deduct that VAT as input tax subject to the normal rules.
In this world nothing is certain than Tax and Death.