Notes G10 ACC - VAT
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Grade 10 Accounting Notes
SET 1:
TAX
VAT
Name: ________________________
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TAXATION AND VALUE-ADDED TAX (VAT)
Outcomes
LO1 FINANCIAL INFORMATION
The learner is able to demonstrate knowledge, understanding and the application of
financial information according to generally accepted accounting practice and
concepts
Assessment Standards
1.7 Explain basic VAT concepts
TAXATION IN SOUTH AFRICA
Before studying the specific principles of VAT, it will be useful to consider the
overall context of taxation in general.
In all countries adhering to a capitalistic economy, the forces of demand and supply
determine the goods and services offered by and to the citizens and business
organisations. If the population demands a certain product or service, then
businesses will tend to be formed to satisfy that demand. For example, several years
ago there was a certain demand for cell-phones in this country, which led to the
formation of MTN, Vodacom and Cell-C. The demand and supply for any product or
service ultimately determines its price, and suppliers will enter the market if they
feel that the expected financial returns are worth while.
However, the market forces cannot always be relied upon to provide certain products
or services on a scale and at a price that the country needs. Market forces are also
affected by economic conditions. For example if there is a shortage of money in the
country, the demand for luxury goods will decline and certain suppliers might close
down their businesses. This cannot be allowed to happen in the case of essential
services that the country needs for its continued existence and
progress.
Consider the case of the country’s police force. The SA Police
Services offer their services free to the population of South
Africa. History has proved that there is no entrepreneur or
business organisation that would be willing to use its resources in
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providing a service such as this for no return. It is true that commercial security
companies have started up. These companies charge fees for their services, which
they offer only to those consumers who might demand more than the public service
offered to all South Africans and who are willing to pay more for that service.
Similar considerations apply in other areas of South African life such as education,
the justice system, health services, roadworks, the defence force and government
administration. In years gone by the South African government was responsible for
the provision of many more services than it provides today, but as the economy of the
country has developed, more and more of these services have become the
responsibility of commercial organisations.
Telkom and Iscor are two examples.
Most governments, however, provide the following:
• a police service
• a defence force
• hospitals, clinics and other medical services
• education
• road and rail infrastructure
• social welfare
• water
The Government requires income to cover these costs. The income it receives is
mainly in the form of taxes. The people of the country should see taxation as a
contribution towards the support of their country and fellow citizens. The Income
Tax Act is a law passed in parliament which makes it compulsory for every person and
company to pay tax on the income earned by them, according to the tax rates laid
down in the Act. All employers are required to deduct this income tax from their
employees on a monthly basis and pay it over to South African Revenue Services
(SARS) who collect the taxes due to the government. This is known as the PAYE (Pay-
As-You-Earn) system.
Those people who are self-employed are required to register as provisional taxpayers
and submit provisional tax returns every six months. The Income Tax rates are based
on a progressive rate structure. The higher a person’s income is, the higher his tax
rate. At present (stated in the 2006 Budget), persons earning less than R40 000 per
year do not pay income tax. (This figure can be adjusted by the Minister of Finance
at any time). Thus our income tax system is based on the idea that the wealthy should
carry a greater part of the tax load than the poor. For this reason, the more a person
earns, the higher the percentage tax he or she pays on his or her income.
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There are several other forms of tax levied in South Africa. Customs duty is levied
on imported items. Excise duty is levied on certain items, the usage of which the
government wishes to restrict e.g. alcohol or cigarettes. Estate duty is levied on
the value of a person’s wealth when he dies. Transfer duty is
levied on the purchase price of land and buildings.
Value-Added Tax is yet another example.
ACTIVITY 1 (in pairs/ group of three)
Compile a wall-chart or PowerPoint presentation
to reflect:
- The sources of tax revenue received by the government
- The areas in which the government spends the tax
revenue.
ACTIVITY 2
Debate
The motion is:
“The country will benefit as a whole if income tax is abolished.”
Team A is to propose the motion. Team B is to oppose the motion.
VAT accounts for about 27% of total tax revenue/income.
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THE GENERAL PRINCIPLES OF VALUE-ADDED TAX
ACTIVITY 3 BASELINE ASSESSMENT (individual and in pairs)
Look at the till slip and answer the
questions that follow.
1. What does VAT stand for?
2. What is the current rate of VAT
in South Africa?
3. There is a VAT registration number
printed on the till slip.
Why should VAT numbers appear
on the source document?
4. There is an asterisk (*) next to
some of the amounts on the till slip.
Why is it there?
5. Find a partner and take five minutes to discuss what you know
about VAT, what it is, and how it works.
Work together to draw a diagram showing how VAT works.
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VAT is a tax paid by everyone, rich or poor, whenever they buy anything.
The government introduced VAT on 29 September 1991. VAT
is the most pervasive of all the taxes levied in South Africa as
it applies equally to all persons. No person, irrespective of how
little he earns, is exempted from paying VAT. Many people may
argue that VAT is the fairest system of taxation.
VAT is charged on the supply of goods or services by a vendor (i.e. a supplier). It is
based on the value of the item and on the general rule that the same rate is charged
on all goods and services unless they are zero-rated or VAT-exempt.
The general rule is that a vendor charges the consumer a standard rate of 14% VAT
(this % is controlled by the government and can be adjusted by the Minister of
Finance at any time) on the price of articles or services charged by him.
If a vendor quotes a price and does not mention VAT, the price is presumed to
include VAT. The vendor deducts the value of VAT paid by him to his suppliers. The
vendor is required to pay over the difference to SARS every month. This represents
tax on the ‘value added’ by his business.
As we shall see below, the system is not so simple but it is effective in the manner in
which SARS is able to collect all the tax revenues due.
What ‘value-added’ means
This flow diagram shows a typical distribution chain for a cake,
from the raw material (maize grown by a farmer) to the final product
(a cake bought by a consumer).
Farming: Maize Miller: Flour Manufacturer: Baker Retailer: Spar Customer
At each stage, value is added to the product and a profit is made by each of the
businesses in the chain, for example:
• The farmer grows the maize then harvests it.
• At the mill, the maize is produced into flour.
• The baker uses the flour to bake cakes.
• The retailer, such as Spar stores, displays and markets the cakes, so
that the customer can make an informed decision as to which cake to
buy.
VAT was introduced in South Africa in September 1991. Originally it was 10%, but increased to 14% April 1993.
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How VAT works and how it affects the consumer
VAT is charged on goods as well as services. For example, the fees charged by an
advertising business or an accountant are subject to VAT. VAT is charged on any
activity carried out regularly or continuously by businesses, traders, manufacturers,
professional persons or clubs.
Supplies on which VAT is not levied include:
- private sales of personal or domestic items
- hobbies or any private recreational pursuit (unless this becomes a business)
- salaries and wages
- supplies that are exempted from VAT, or those that are zero-rated (we will
look at this later).
VAT is charged on the value that is added by each business in the
chain and paid over to the government department known as the
SARS. Although each business in the chain pays VAT on the goods
it buys, if they are registered VAT vendors they can claim this
tax back. The last person in the chain, the consumer, cannot claim VAT back. Vendors
registered for VAT are obliged to collect VAT from their customers or clients on
behalf of SARS.
VAT is a form of tax in at least 50 countries around the world.
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REGISTRATION AND PAYMENT PROCEDURES
It is compulsory for all businesses with sales (turnover) in
excess of R1 000 000 per year to register as a vendor.
Registered vendors are then issued with the necessary
forms which must be submitted to SARS every second
month together with the amount payable.
A business with sales less than R1 000 000 may apply for voluntary registration that
means that they can deduct their input taxes from the output taxes in paying over
the required amount. A business selling mainly to other VAT vendors should consider
registering, because the VAT paid on its inputs is deducted from the VAT it charges
its customers. Businesses which are not registered as vendors are simply required to
pay over the full 14% on cost prices to their suppliers, who will pay over the VAT to
SARS. In other words, it cannot charge consumers output VAT and it cannot claim
back its input VAT.
No business earning less than R20 000 is allowed to register as a vendor.
In assessing the sales value, SARS will consider the owner and not specific
businesses. For example if you own one business with sales of R800 000 and another
business with sales of R220 000, you will have to register as a vendor because your
combined turnover exceeds R1 020 000. As a businessman, one of your concerns
might be that if you sell on credit and have to wait for payments from your debtors,
you might face a liquidity problem if you have to pay VAT in the month in which the
sales transaction occurs. It is for this reason that the VAT regulations make
provisions in the calculations to avoid this problem.
The person, and not the business, has to be registered for VAT If a person has
several businesses, or branches or divisions of a business, the person must be
registered only once, unless the person applies to SARS for separate registrations
for each branch or division that maintains a separate accounting system. However,
each separate branch will remain a part of the person who has registered.
For example, Jake Solomon owns a book store that has yearly sales of R880 000, and
a restaurant with yearly sales of R150 000. He must register as a VAT vendor
because the sales of the two businesses combined are R1 030 000, which is more than
R1 000 000.
Once a person or a business has registered as a VAT vendor, he or she will be entitled
to:
• claim a deduction for VAT paid on any business expense that includes
purchases of stock
• issue tax invoices to customers who are vendors so that they, in turn,
can claim their input tax deduction.
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TWO KINDS OF VAT:
Input VAT
The VAT paid by each business for goods and services bought from other businesses
in the chain is known as input VAT.
Output VAT
The VAT that is charged to customers is called output VAT.
Worked Example 1
A furniture wholesaler purchases a table for R570 (R500 + R70 input VAT).
He sells it to the consumer for R969 (R850 + R119 output VAT).
In respect of the purchase, the wholesaler can claim an input of R70, which
SARS owes him. He takes this amount from the R119 output tax paid by
the consumer.
The wholesaler is then required to pay the R49 (the R119 minus the R70
input tax) to SARS.
ACTIVITY 4
Think of your own example of a business that buys goods, pays input VAT on the goods and then sells the goods at a higher price, on which output VAT is
then paid. Examples of goods can be furniture, cars, soap, or any other item
that you are likely to find in a shop or at a market. Draw a picture or a comic
strip illustrating this process.
In terms of the amount that must be paid to SARS, the input VAT amounts to less than the output VAT. If the input VAT is greater than the output VAT, SARS will refund the business.
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ZERO-RATED ITEMS
As a general rule, all taxable supplies are subjected to the standard rate of 14%
(VAT-able items). However certain items are zero-rated which means they are
subject to a tax rate of 0%. However, this % can be adjusted at any time by the
Minister of Finance.
Zero-rated items comprise goods or services that normally would be subjected to
VAT, but which because of their nature, cause hardship to indigent (poor) consumers
if 14% VAT were to be levied. In order to help poorer people cope with the tax
burden, the government has declared certain basic foodstuffs and other essential
goods zero-rated.
Here is a list of zero-rated products:
• brown bread • lentils
• paraffin • maize products
• milk • cooking oil
• rice • fruit • eggs
• canned pilchards • milk powders and blends
• dried beans and legumes • vegetables
• diesel fuel • petrol
Petrol and diesel fuel are also zero-rated but they are subject to fuel
levies which are included in the pump price.
Although the businesses selling these products cannot charge VAT on them, they can
claim back from the government any input VAT that they have paid.
ACTIVITY 5
Mark all the items that are zero-rated for VAT with a X.
Good or service Zero-ratedWhite breadBreakfast cerealPetrolChipsTinned jamRiceMaize meal/mealie mealCarrotsMilk powderLentils
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VAT EXEMPTED ITEMS
VAT-exempted goods and services are those items that, by law, are not subject to
VAT. VAT may not be charged on these items at all and the businesses selling these
goods cannot claim any input VAT from them.
The following are VAT-exempt goods and services:
• salaries and wages
• hobbies or any private recreational pursuit (unless the hobby becomes a
business, for example your hobby of restoring furniture turns into the
way you earn your living)
• private sales of personal or domestic items
• services charged by banks and other financial organisations
• goods and services supplied by schools and other non-profit
organisations
• donated goods.
• interest
• rates
• export services
• child care services
• educational services
• services provided by associations not for gain
This may seem similar to zero-rated items but it is not.
Remember, zero rated items could be charged VAT at any stage the Minister of
Finance decides to increase the % above 0. Whereas VAT-exempted items cannot
have VAT added to the price at all.
EVASION AND AVOIDANCE OF TAX
It is every person’s prerogative to avoid the payment of tax as much as
possible. For example, if you wish to pay as little VAT as possible, then
you may reduce your purchases. If you wish to pay less income tax, then
you can transfer your savings into tax-free investments such as endowment funds or
government bonds.
However, it is illegal to evade tax. If you have earned income which is taxable, it is a
legal requirement to declare this income on your tax returns and the appropriate tax
will be levied by SARS. If you fraudulently submit incorrect tax returns, you will be
guilty of tax evasion which is a criminal offence punishable by fines or imprisonment.
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Tax evasion is a potential problem that every government tries to combat. It must be
remembered that the government needs a certain amount of tax revenue in order to
cover its expenses. If the government is unable to combat tax evasion, a
consequence will be that tax rates will be increased which means that the honest
taxpayers are disadvantaged even further. In recent years, South Africa has
experienced declining tax rates for a variety of reasons, one of which is the
increased efficiency in collecting taxes.
ACTIVITY 6 Role-play
One person enacts the part of tennis coach who makes a lot of money in
charging fees for tennis lessons. She/he has a flashy car and she/he holidays
overseas. She/he accepts only cash, not cheques, and she/he does not issue
receipts. She/he brags that she/he does not pay taxes and SARS cannot catch
her/him for tax evasion. She/he charges VAT on her/his fees, but she/he is not
registered as a vendor.
Another person enacts the part of her/his neighbour who earns a fixed salary
from her/his employer (PAYE is deducted each month) and struggles to cover
her/his costs each month.
The role-play is intended to communicate:
- The difference between tax evasion and tax avoidance
- The lack of ethics on the part of the tax evader
- The effect on honest taxpayers if tax evasion is allowed to exist.
You may change the circumstances and you may introduce other characters
e.g. a SARS inspector (or St Peter at the pearly gates!)
ACCOUNTING FOR VAT
Accounting for VAT on source documents: Most businesses mark their stock with
the selling price including VAT, so that customers know exactly how much they have
to pay for goods. On most cash sales slips and invoices the business then breaks down
the price showing separately the selling price and the VAT charged.
Accounting for VAT in the journals: Because businesses that are registered VAT
vendors can claim back any input tax they have paid, they need to record all amounts
of VAT that they have paid (input VAT). This is done in the Cash Payments, Creditors
and Petty Cash Journals. In the same way, businesses have to record the VAT they
have charged customers (output tax). This is done in the Cash Receipts and Debtors
Journals.
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SUMMATIVE ASSESSMENT (individual work)
Imagine that you are a financial adviser who replies to questions sent to a
popular magazine by its readers. This is one of the letters to which you need to
reply.
Dear Financial Adviser, Last year, I started a business where I bought liquid cleaning soap in bulk. I then repackaged it into small containers, which I sold to retailers. My sales for the year were R200 000. I bought soap and material, which cost R100 000 plus R14 000 VAT. I also paid R30 000 plus R4 200 VAT for other business expenses, like stationery, advertising, telephone and rent. I need to know the answers to the following questions: Do I hove to register as a VAT vendor? If I do not have to register, can I register if I choose to do so? What benefits, if any, would I receive by registering as a VAT vendor? Which items are exempt from VAT? Yours sincerely Tina Zuma
Now answer these questions.
1. How much input VAT did Tina pay?
2. If she were a registered VAT vendor, how much output VAT would she
charge at the present VAT rate?
3. Write a letter to Tina answering her questions.
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CHECKLIST Skills Requires more
attention
Yes -
proficient
Complete
Understand the reasons for taxation in
the country
Understand the basic principles of
Value Added Tax
Understand who needs to register as a
VAT vendor
Understand the difference between
standard VAT, zero- rated and tax
exempted items
Understand the difference between tax
evasion and tax avoidance
GLOSSARY Bank overdraft: when a person or a business needs access to more money than their
income allows, they can apply for more money in their bank account.
Bookkeeping: the recording of transactions in the books of a business.
Current asset: a business resource, which is converted into cash during the course of a
financial year.
Equation: a mathematical phrase, which always contains an equal sign (=). An equation can be
manipulated and the terms moved around, as long as what you do to the one side, you do the
same to the other side.
Expenses: amounts incurred by a business in the daily running of the business, and which
are necessary in order to earn an income. They have the effect of decreasing the owner’s
equity of the business.
Financial accounting: the recording, reporting, analysing and interpreting of the financial
transactions of a business.
Income: the amount earned by a business through its daily operations and through its
investments. It has the effect of increasing the owner’s equity of the business.
Managerial accounting: when accounting information is used to help the owners or
managers to make decisions about the future of the business.
Mortgage bond: money that is borrowed from the bank in order to buy property.
Perpetual: continuous: In the perpetual inventory system we continuously keep track of our
inventory (or stock), so we always know how much we should have on hand at any time.
Profit: the amount by which incomes earned exceed expenses incurred in earning the income.
Retail concern: a business that sells tangible goods to customers to satisfy needs.
Examples of retail concerns are shops, cafes, dress shops and CD stores.
Service concern: a business that provides a service to customers for a fee. It does not
provide a tangible product, but rather uses its skills to meet a need. Examples of people who
own service concerns are lawyers, doctors and painters.
Transaction: any event between people doing business in which something is exchanged for
something else.
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