At the retail level, sellers are charged the statutory VAT rate (currently 14% for all commodities except gold which is zero-rated so pays no VAT) and receive a rebate for the tax revenue paid on intermediate inputs. The net payment is the statutory VAT rate applied to only the value added for that commodity. This tax collection method encourages “self-policing”— producers are more likely to purchase intermediates from sellers who can verify that they have paid the value added taxes due. When the VAT was initially introduced, there were concerns that it could not replace the GST as a source of government revenue.
In addition, a VAT may affect producers’ input choices. When the VAT is administered with rebates for intermediate inputs, there is, in effect, a subsidy for intermediate input use. Producers may substitute intermediates for primary factors (land, labor and capital), affecting the return to factors and income distribution. Another concern is that the VAT, because it is an indirect tax that works through the price system, puts a larger burden of the tax on low-income households. VAT CONCEPTS Zero-rated items| Zero-rated items are goods or services which are taxed at a rate of 0%, e. g. milk, brown bread, maize, fruit, etc. VAT-exempted items| These items involve services that are not subject to VAT at either the standard rate or zero rate, e. g. childcare services, educational services, etc. | Standard rate| In South Africa Standard-rated supplies are taxed at the rate of 14%. | VAT-able items| These items are goods or services that are subject to VAT. | VAT Output | VAT paid on items purchased and can be claimed back from SARS. It is VAT, which your company would charge on items, which it, sells. Thus a company could wish to sell an item and added to the amount a standard rate tax would be charged. VAT Input| VAT on Sales and income and must be paid over to SARS. It is VAT that you pay on all your business expenses and for which you have a tax invoice. It also relate to VAT that is paid on other goods and services bought or rented for the business. | VAT Control | Is a summary of the VAT Input and Output and shows whether the business owes SARS money or whether SARS owes the business money. | VAT CALCULATIONS How to add VAT (Value Added Tax) to a price (14%) This is the calculation you need to use when you know a PRICE BEFORE TAX (THE NET PRICE) but want to find out the PRICE AFTER TAX (THE GROSS PRICE). VAT rate of 14%. |
Net price| Multiplied by| 1. 14| = Gross price| Price before tax| Multiplied by| 1. 14| = Price after tax| Calculations: The VAT standard rate is rate of 14% First, get the multiplier: 14 100% = 0. 14 0. 14 + 1 = 1. 14 The multiplier is 1. 14 So… | Net price| Multiplied by| 1. 14| = Gross price| Price before tax (Net price)| Multiplied by| 1. 14| = Price after tax (Gross price)| E. g. : | | | | R100| Multiplied by| 1. 14| = R114| R100 + Tax| | | = R114 inc Tax| How to deduct VAT from a price – (14%) People can often add VAT to a figure, but when it comes to taking it off it is a problem. So here it is… Taking-off VAT (Tax) from a price
This is the calculation you need to use when you know a PRICE AFTER TAX (THE GROSS PRICE) but want to find out the PRICE BEFORE TAX (THE NET PRICE). VAT rate of 14%. | Gross price (price after tax)| Divided by| 1. 14| = Net price| Price after tax | Divided by| 1. 14| = Price before tax (Net price)| Calculations: The VAT standard rate is rate of 14% First, get the divisor: 14 100% = 0. 14 0. 14 + 1 = 1. 14 The divisor is 1. 14 So the back calculation for 14% VAT is … | Gross price| Divided by| 1. 14| = Net price| Price after tax| Divided by| 1. 14| = Price before tax| E. g. | | | R114. 00| Divided by| 1. 14| = R100|
R114. 00 inc Tax| | | = R100 + Tax| THREE BOOKKEEPING ACCOUNTS For the purposes of Value Added Tax (VAT) records, three bookkeeping accounts must be kept. 1. The VAT on inputs account. 2. The VAT on output (transactions) account. 3. VAT Control (Debit and Credit) account. * The VAT on Inputs Account –This account will usually show a debit (the VAT SARS “owe” you money for the VAT you have paid and you are entitled to receive from them). * The VAT on Output (Transactions) Account –This account will usually show a credit (the VAT SARS are “entitled” to receive the VAT from you that you have collected on their behalf.
The money is not yours and it is only temporarily in your possession until the due date for the payment of VAT. * The VAT Control (Debit and Credit) Account. This is the account to which the 2 first accounts are posted. The account balance may show a credit, when the periodic report to the VAT is for a payment to be made, or it may show a debit when the periodic report shows that that money is to be returned. VALUE ADDED TAX: CALCULATIONS| Notes, Assessment Tasks and solutions| Learning OutcomesPerform elementary VAT calculations: Calculation. |
Value Added Tax is a tax on the supply of goods and services which is eventually borne by the final consumer, but which is collected at each stage of the production and distribution chain. Currently the Standard rate of VAT in South Africa is 14% and this is the rate to be used when answering all questions. QUESTION 1 On 17 March, Tilly sells goods to the four customers shown in the table. The value of the goods is also shown. VAT has not yet been included in the invoice price of the goods. Calculate the value of VAT in each case and the total value of the invoice to be sent to each customer.
CUSTOMER | VALUE OF GOODS SOLD| VAT | INVOICE TOTAL| Nina | R 54. 67| | | Khentsane | R 132. 91| | | Phuti | R 17. 54| | | Bongi | R2 381. 92| | | QUESTION 2 On 4 September, Harry receives invoices for goods that he purchased. The invoices show the total price of the goods including VAT. Calculate the value of goods that Harry received and the amount of VAT added to this to produce the invoice total. SELLER | INVOICE TOTAL | VALUE OF GOODS PURCHASED | VAT| Cindi | R 325. 76| | | Xolani | R 54. 22| | | Tenyeko | R4 571. 09| | | Azwindini | R 72. 77| | | NB.
The most difficult calculation involving VAT is encountered when cash discount is involved. QUESTION 3 Fill in the gaps. Two types of discount are used in the business world: a. __________ is a reduction in price when goods are supplied to other businesses (usually in the same line of business). This reduced price is not available to the general public. This type of discount is generally shown on the invoice (source document), but is not included in the double-entry records. b. __________ is an allowance that can be deducted from the total amount charged for goods if the debt is settled within a time specified by the supplier.
This type of discount is only recorded when advantage is taken of the reduction. QUESTION 4 Bernard sells goods valued at R2 760 to Aileen. Aileen is allowed a 25% trade discount. Calculate: a) The amount that Bernard will show on his sales invoice for the goods sold and the amount that he will enter in his sales journal b) The amount that Aileen will enter in her purchases journal Notes: CASH DISCOUNT One of the trickiest calculations that you will come across during your accounting studies involves the calculation of VAT on goods that are subject to both trade and cash discount. Learn it and practice it several times.
He allows Mapule 25% trade discount and 3% cash discount for settlement within 30 days (invoice no. 1,235). Also, on 4 October Maleka sells goods to Bongani with a catalogue price of R518. Bongani’s order is subject to 50% trade discount and a cash discount of 1% if the debt is settled by the end of the month (invoice no. 1,236). Calculate: a the total of the sales invoice sent to Pierre b the total of the sales invoice sent to Mapule c the total of the sales invoice sent to Bongani d Prepare the entries in Maleka sales journal. Maleka: sales Journal | Date| Particulars| Invoice no. Sales| Vat| Invoice total| 3 October| Pierre| 1 234| R| R| R| 4 October| Mapule | 1 235| | | | 4October| Bongani | 1 236| | | | SOLUTIONS QUESTION 1 Calculate the value of VAT in each case and the total value of the invoice to be sent to each customer. CUSTOMER | VALUE OF GOODS SOLD| VAT | INVOICE TOTAL| Nina | R 54. 67| R 7. 65| R 62. 32| Khentsane | R 132. 91| R 18. 61| R 151. 52| Phuti | R 17. 54| R 2. 46| R 20. 00| Bongi | R2 381. 92| R333. 47| R2 715. 39| QUESTION 2 Calculate the value of goods that Harry received and the amount of VAT added to this to produce the invoice total.
SELLER | INVOICE TOTAL | VALUE OF GOODS PURCHASED | VAT| Cindi | R 325. 76| R 280. 15| R 45. 61| Xolani | R 54. 22| R 46. 63| R 7. 59| Tenyeko | R4 571. 09| R3931. 14| R639. 95| Azwindini | R 72. 77| R 62. 58| R 10. 19| QUESTION 3 Fill in the gaps. A. Trade discount B. Cash discount QUESTION 4 Bernard sells goods valued at R2 760 to Aileen. Aileen is allowed a 25% trade discount. a) R2 060 b) R R2060 QUESTION 5 (a) (b) (c) A. Pierre| B. Mapule| C. Bongani| R7 500. 00| R376. 0| R 581. 00| Less Trade discount 2 497. 50| Less Trade discount 94. 00| Less Trade discount 259. 50| 5 002. 50| 282. 00| 259. 50| Less discount 125. 06 | Less Cash discount 8. 46 | Less Cash discount 2. 59 | 4877. 44| 273. 54| 256. 1| Add VAT 882. 84 | Add VAT 38. 30 | Add VAT 35. 90 | Total value of invoice 5560. 28| Total value of invoice 311. 64| Total value of invoice 292. 31| d Prepare the entries in Maleka sales journal for 3 and 4 October. Maleka: sales Journal | Date| Particulars| Invoice no. | Sales| VAT| Inv. Total| 3 October| Pierre| 1 234| R 4677. 44| R 682. 84| R 5560. 28| 4 October| Mapule | 1 235| 273. 54| 38. 30| 311. 64| 4October| Bongani | 1 236| 256. 41| 35. 90| 292. 31|