Chapter 15 - PaperT5

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CHAPTER 15

VALUE ADDED TAX III

After studying this chapter you should be able to apply the followingSpecial Retailer Methods:

Method A

Method B

Method C

15.1 SPECIAL RETAILER METHODS

Generally a taxable supplier is required by law to record each separate supply ofgoods and services in the period in which the Tax point falls or at the time of supply.But a retail shop cannot always keep separate record of each supply as it is made,although with VAT it may be making standard rated, zero-rated and exempt supplies.Three methods of calculating output tax on standard rated supplies have beendesigned which greatly simplify VAT accounting for retailers (Method A, B, and C).The three methods are described in this chapter with the aim of providing a usefulinsight on the prerequisites of applying any of the methods by retailers.

Method A requires the retailer to separate sales into the exact amounts

sold in each category (i.e. standard rated, zero-rated, or exempt).

Method B requires Sales to be apportioned in the same proportion of the

standard rated and zero-rated/ exempt purchases.

Method C allows a retailer to calculate the estimated sales of zero-rated/

exempt items by the uncomplicated method of listing all such purchasesand adding a flat 10% mark-up onto them. The balance of sales is deemedto be the total daily gross takings less the estimated zero-rated/ exemptsales obtained by this method.

If for any reasons a Retailer cannot use any Retail Method then he must use thenormal way of accounting for output tax, that is, Invoice basis and record each

separate supply as it is made.

T5 TaxationAmendment Act 2006/07

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Qualifying Retailers

Only retailers who sell directly to consumers may use a Retailer Method and only forthose supplies made directly to the consumers. This means that:

Wholesale supplies and supplies to associated businesses made by a

Retailer who uses a Retailer Method should be accounted for outside theRetailer Method;

Supplies of professional services such as accountants and lawyers who

normally bill their customers are not eligible to use a Retailer Method;

Supplies from restaurants, canteens, cafeterias and other similar

businesses are not eligible to use a Retailer Method; and

Manufacturing Retailers e.g. bakers, shoe manufacturers etc who sell

directly to consumers or suppliers of services who sell directly to the publicare only eligible to use Retailer Method A.

Retailer Method C is only available for a retailer who has a retail sales

turnover not exceeding K200m per year, and only covers retail saleswhere tax is accounted for using daily gross takings (i.e. it does not applyto invoiced sales where tax is calculated from a listing of their totals).

Does the Retailer Method affect the Tax period?

No. Where a Retailer has decided to use a Retailer Method he will still have to usethe tax period allocated to his business, and he will be required to submit his VATReturn within 21 days after the end of that tax period.

Accountable Records

A Retailer Method will not relieve a taxpayer of the responsibility to maintain Taxrecords. He will be required to keep records and accounts to include:

A separate record of daily gross takings;

Till rolls; and

A record of till readings (e.g. X and Y readings for tills A and B for each

day).

The Zambia Revenue Authority may require the Taxpayer to maintain other additionalrecords and accounts if they find it necessary.

MULTIPLE BUSINESSES

Where a Taxpayer has used the Retailer Method but is engaged in other businesseshe need not apply the retailer method exclusively.

Other than for those particular Supplies, which are eligible for a Retailer Method, he isrequired by the ZRA to account for the rest of the Supplies outside the RetailerMethod (using either Invoice Basis or Payment Basis), he can use:

A Retailer Method for all his supplies if all of them are eligible;


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A Retailer Method for his supplies which are eligible and the normal way of

VAT accounting for the rest; or

A combination of Retailer Method A, Retailer Method B and Retailer Method C

if his supplies are eligible.

DAILY GROSS TAKINGS

What Are Daily Gross Takings?

Rather than record separately each supply as it is made, a Taxpayer keeps a recordof his sales on daily basis. Gross takings means that all payments that are receivedfor goods supplied must be included on the day the payments are received, and thisincludes payments made for supplies before starting to use a Retailer Method orbefore registration. Failure to include all payments will result in an underpayment oftax and will result in the Tax Payer incurring penalties and interest, in addition to thetax arrears. Particular care must be taken to add back into the days takings any

money taken out, for example, from the till to pay for cash expenses.Some Basic Rules

If the Tax payers record of daily gross takings is wrong, his calculation of Output taxwill be wrong; so he must:-

Addto the gross-takings any monies removed from the daily gross takings as

owner's drawings or for making payments for purchases;

Add to the daily takings the normal selling price of the goods he has taken

from stock for personal use or the use of others;

Addto the gross takings the normal selling price of goods he has supplied but

for which payment is not made in money, e.g. goods taken in part exchange;

Deductfrom the gross takings payments that are not being accounted for by a

Retailer Method e.g. wholesale supplies; and

Deduct from the gross takings any refunds made to customers when goods

are returned.

SPECIAL CASES

a) Payment by Cheque or Credit Card

The Tax Payer should include in the gross takings payments made in these ways as if

he were receiving cash for the full amount payable. That is to say that there should beno distinction between Cash and credit Card / Cheque payments.


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b) Deposits

A deposit is usually an advance payment and should be included in the Tax Payersgross takings on the day he receives it.

c) Sales on Credit Terms

If the Taxpayer has given credit to his customers, thus giving them time to pay, butmakes no additional charge for the credit, he may include all payments in the grosstakings as he receives the payment. If he charges an additional amount for the credit,that additional charge is exempt and should be treated as an exempt sale in his RetailMethod A calculations.

D) Exports

Any exports that a Tax Payer makes are Zero-Rated if they are accounted for outsidethe Retailer Method using the normal way of accounting for VAT and subject to thenormal requirements for exports.

e) Disposal Of Business Assets

If a Tax Payer sells any of his business assets, for instance a Motor Vehicle, he

should account for it outside the Retailer Method, and pay VAT to the ZambiaRevenue Authority using the normal way of accounting for VAT.

CALCULATING TAX FROM GROSS TAKINGS

Separating the Tax in Gross Takings

Whichever Retailer Method a Tax Payer uses it will divide his gross takings for eachmonth into standard rated and zero-rated /exempt gross takings. But retail prices oftaxable goods or services include the tax and we need a way of separating the tax

from the rest of the taxable gross takings. We do this by multiplying taxable grosstakings by what is called the VAT fraction.

Computing the VAT Fraction

The VAT fraction depends on the rate of tax, but whatever the rate the fraction isquite simple. It is computed as follows:

The Rate of VAT / Rate of VAT + 100

17.5 = 17.5 = 7

17.5 + 100 117.5 47


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Example:

Maluba Mulevu

Maluba Mulevu has used the Retailer Method to arrive at her standard rated grosstakings which amounts to K6,000,000

Multiply the VAT fraction to standard rated gross takings figure for the tax period tofind the output tax, if for instance the figure is K6,000,000

Answer:

K6,000,000. X 7/47 = K893, 617= Output Tax for the Tax Period.

If there is another change in the tax rate you should recalculate your VAT fraction and

use the new VAT fraction from the date of the change.

15.2 RETAILER METHOD A

At the time of sale the Tax Payer must be able to allocate his takings betweenstandard rated and zero rated /exempt supplies. He must be able to do thisaccurately which means that his partners or employees receiving payments, usuallyat the till or cash register, must know which goods are standard rated and which arezero-rated /exempt. Separate tills, or multi-total tills, are a good way of separating theTax Payers takings as required. Another way is to use different color price labels sothat the members of staff operating the tills can identify which supplies are standardrated and which are zero-rated /exempt.

Having separated his takings of taxable supplies from gross takings for the tax periodof the VAT Return the Tax Payer should:

Multiply his total taxable supplies for the tax period by the VAT fraction

Then add on the tax due on any supplies gross takings on which he is

calculating tax outside the Retailer Method;

The total figure should be entered in Box 1 of the VAT Return (VAT 100).


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Example:

Step 1:

Add up the Tax Payers daily gross takings from standard rated sales for the tax

period - K6, 500,000.;Step 2:

Multiply these standard rated gross takings (step 1) by the VAT fraction -K6, 500,000. X 7/47 = K968, 085.11. This is the Tax Payers out put Tax.

Step 3:

Add the output tax charged during the month using invoice and payments basis; and

Step 4:

Add the figures in Step {2} and {3} and insert it in Box 1 of the VAT Return (Form VAT100).

15.3 RETAILER METHOD B

This method divides the Tax Payers gross takings for each tax period betweenstandard rated and zero-rated /exempt supplies in the same proportion as betweenthe value of the Tax Payers taxable and exempt purchases for resale in the same taxperiod: there is an adjustment after twelve months, when the Tax Payer uses thesame way of dividing gross takings for the tax year ending 30 June each year (thismeans that if his effective date of registration is other than 1 July, his first adjustmentwill come after less than twelve months). The Tax Payer is also required to make the

adjustment if he ceases to be registered or stops using Retailer Method B.


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Example:

Step 1:

Add up all the daily gross takings for the month K20,000,000

Step 2:

Add up the cost to the Tax Payer, including VAT of all standardRated goods received for resale in the month K5,000,000.

Step 3:

Add up the cost to the Taxpayer, including VAT of all goods (Standard rated andzero-rated /exempt) you received for resale in the month K9,000,000.

Step 4:

Apportion the month's gross takings as follows using the figures above:

K5,000,000.00 (step 2) x K20,000,000.00 =K11,111,111.11

K9,000,000.00 (step 3)

Step 5:

Multiply the taxable gross takings (Step 4) by the VAT fraction as follows:

Output tax =K11,111,111.11 X 7/47 = K1,654,846.34

Step 6:

Add the output tax on supplies that the Tax Payer accounts for Outside the RetailerMethod and the Output tax in Step 5 above. The Total figure is then inserted in Box1of the VAT Return (VAT 100).


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ANNUAL ADJUSTMENT FOR RETAILER METHOD B

The twelve months adjustment is done following the same steps above.

Example:

Step 1:

Add up the daily gross takings for the last twelve months K90,000,000.

Step 2:

Add up the cost to the Taxpayer, including VAT, of all the taxable goods he receivedfor resale in the last twelve months K30,000,000.

Step 3:

Add up the cost, including VAT, of all goods:

(Standard rated and zero-rated /exempt) you received for resale in the last twelvemonths K60,000,000.

Step 4:

Apportion gross takings for the last twelve months as follows

(Using the figures above)

K30,000,000. (Step 2) x K90,000,000. (Step 1) / 60,000,000 (step 3) =K45,000,000.

Step 5:

Multiply the taxable gross takings (Step 4) by the VAT fraction K45,000,000.00x7/47 =K6,702,127.70= Output tax for the 12 months.

Step 6 :

Add up the tax calculated from the Retailer Method on each of the twelve months andcompare it with the total figure for the twelve months, and adjust the difference in theVAT Account.


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15.4 - RETAILER METHOD C

This method enables a business to calculate the standard rated sales by listing thezero-rated and exempt purchases for resale and adding a flat mark-up onto them.

Example:

Step 1 - Prepare schedules of zero-rated and exempt purchases for resale during thetax period (separate totaled columns for each are usually advised by the ZRA);

Step 2-Sum the zero-rated and exempt schedules in Step 1 and add the totals: e.g.Total zero-rated purchases=K3,000,000; Total exempt purchases =K1, 500,000

Total zero-rated and exempt purchases =K3,000,000 + K1,500,000 = K4,500,000.

Step 3 -Add 10% mark-up to the total figure obtained in Step 2 to arrive at theestimated total sales at the zero-rate or which are VAT exempt;

= 110 X 4,500,000

100

=K4,950,000

Step 4-Total the gross takings from cash sales in the Tax period

(Remember to add back to the daily gross takings any cash paid out for cashpurchases, expenses, wages, drawings etc) e.g. = K10,950,000

Step 5 - Calculate the standard rated sales in the Tax period by subtracting thefigure arrived at in Step (3) the zero-rated/ exempt sales) from the figure arrived atin Step (4) - the daily gross takings in the tax period

= K10,950,000 - 4,950,000 = K6,000,000

Step 6 -Calculate the output tax on retail sales by applying the VAT fraction to thestandard rated sales calculated in Step 5. With a 17. 5% VAT rate this means that thefigure from Step 5 is multiplied by 7/47 to obtain the output tax amount K6,000,000 x7/47 = K893,617. 00

N.B The 10% mark-up in Step 3 cannot be varied as this fixed mark-up percentage isa prerequisite of using a Retailer Method C.


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DEALING WITH VARIATIONS

Variation in the rate of tax at the beginning of the month:

It is possible that the Minister of Finance, through a statutory order, may vary theRate of Tax that was obtaining at the beginning of the year during the charge year. Inthe event that this takes place, the Tax Payer is required to operate his RetailerMethod as was done in the past, but use the new VAT fraction for the period whichstarts with the date of the change.

Variation in the rate of tax during the month:

In this scenario the Tax Payer must divide the period into two parts - one part endingthe day before the change and the other starting with the date of the change. Then hemust apply the old VAT fraction to his taxable gross takings for the first period, andthe new fraction to the later part. The tax calculated in the two part periods shouldthen be added together to provide the total output tax from the Retailer Method in the

month.Variation in the liability to Tax of Goods or Services

Where there has been some variation in the Liability to Tax of the Goods or services,for instance where certain goods or services have become exempt in the course ofthe charge year, the Tax Payer is required to operate his Retailer Method in the usualway, but from the date of the change, the record of daily gross takings for taxablesupplies must include takings from supplies which have become taxable, and excludetakings from supplies which have become exempt.

Where Registration has ceased

In Chapter 13 we highlighted the various ways in which registration might cease. Inthe event of any of the factors that might lead to deregistration taking place, the Tax

Payer must operate his Retailer Method up until the day he ceases to be registered.

Ceasing to use the Retailer Method

In the event that the Tax Payer Ceases to use the retailer method he must follow thesame procedure as if he were being deregistered for VAT, except that he will nothave to pay tax on his business assets.

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