Introduction to Value Added Tax (VAT)
Value Added Tax is basically a consumption tax that has to be paid when services and goods are consumed. It is a form of indirect tax that is currently being used by more than one hundred and eighty countries across the world.
Individuals or business entities that have been registered for paying VAT must collect this tax and deposit it with the authorities. VAT is collected from each stage of a supply chain, and ultimately, it is the ultimate user who has to bear its costs. Any individual or business registered for VAT is like an agent for the authorities; they must collect VAT on the government’s behalf and be accountable for it.
How Does VAT Work?
VAT is collected on all business transactions that provide services or goods to a customer. Businesses charge the VAT amount by including it in the value that they charge their customers for the goods and services being bought. Registered businesses are also entitled to recover VAT that they pay when obtaining goods and services from their suppliers. In order to reclaim this amount, these businesses need to calculate the amount of VAT paid and the amount of VAT charged. The difference that is left is what they can reclaim from the authorities.
When it comes to imports, Value Added Tax is applicable on goods that enter a country where they will be used. All VAT registered businesses are responsible for recording their costs, income, and VAT charges.
Common VAT Terms
Here are common VAT terms that you should be familiar with:
- Taxable Person: individuals who are required to register or have registered for VAT based on relevant laws.
- Taxable Supply: services and goods that are counted as within the VAT regulations (except for services and goods that have been explicitly exempted).
- Date of Supply: the specific date on which Value Added Tax is charged for services or goods.
- Goods: material or products that are obtained in order to be used in a company’s business activities.
- Services: any non-tangible consumable that cannot be categorized as goods.
- Output VAT: VAT amount that is added in the payable amount of services and goods being sold to consumers.
- Input VAT: VAT amount that is added in the payable amount of services and goods being bought from a supplier.
- Due Tax: VAT amount that is calculated and then taxed according to the relevant laws.
- Payable Tax: VAT amount to be submitted to the authorities by a VAT registered business or individual.
- Tax Invoice: an invoice detailing the taxation of services and goods that have been sold.
- Tax Period: a set amount of time in which a taxable person must calculate and submit their taxes to the authorities.
- Exempt Supply: services and goods that are exempted from Value Added Tax.
Basics of VAT
VAT becomes applicable to a business’s normal operations when it crosses the taxation point. This point refers to the moment when a company meets the criteria for paying VAT. Once this happens, a business must register itself for VAT and begin observing all laws related to VAT. The taxation point can be described as:
- Services or goods provided to customers
- Issuance of a tax invoice by the party supplying services and goods
- Receiving of consideration by a supplier for services and goods provided
The details of VAT collection vary from country to country since every country has its own set of laws regarding VAT.
VAT is not applicable for every business, there are certain conditions that need to be met before an individual or business becomes a taxable person. This can make tax registration rather tricky for individuals who aren’t familiar with the process. Fortunately, tax consultants can always be hired to provide guidance on this matter.
Businesses that aren’t registered for Value Added Tax cannot collect VAT from their customers. Also, they cannot reclaim VAT that they have to pay when buying services and goods from their suppliers.
Reporting and Calculating VAT
VAT registered businesses have to collect VAT on services and goods provided to its consumers. The VAT amount that they must submit to the authorities is determined by calculating the difference between VAT paid and VAT charged. If the difference is positive, it means that the business needs to pay the calculated amount to the authorities. If the difference is negative, it means that the business can reclaim the calculated amount from the authorities.
In order to complete the VAT reporting process, businesses are required to file a tax return with the authorities in a time period that is specified by the government.
Things to Consider Before Implementing VAT
Businesses or individuals who are about to register for VAT should take the following into consideration:
- Identify a person/team that shall be responsible for ensuring VAT compliance.
- A thorough examination of systems, processes, and procedures that are required in order to fulfill all VAT requirements.
- Making preparations for filing tax returns according to the law. Taxable persons need to decide things such as whether they should form an internal team or outsource their VAT return filing to tax consultants.
- Analysing parts of their business that shall be impacted the most by VAT requirements.
- Ensuring that all staff receives the relevant training in order to comply with VAT laws.
Zero Rated and Exempt Supplies:
Zero-rated supplies and exempt supplies sound like the same thing at first, however, there’s a crucial difference between the two. Zero-rated supplies are services of goods that are charged VAT at 0%. Exempt supplies are services or goods that cannot be taxed. What this means is that businesses dealing in zero-rated supplies can still reclaim VAT tax that they are charged. However, businesses that deal with exempt supplies cannot reclaim VAT that they are charged.
Who has to pay Value Added Tax?
The taxable person who issues a Value Added Tax invoice is made accountable for paying the VAT amount to the government. However, there are exceptions to this based on certain factors.
VAT Handling of Exports
VAT registered entities may also have to charge VAT on services and goods that they export (sell their services and goods to any party located outside of the country). Businesses that export services or goods must provide documentation that acts as proof of the export being made. These documents include:
- Purchase Order
- Sales Invoice
- Delivery note/Packing list
- Insurance Documents (if required)
- Distribution of goods instructions provided by the customer
- Airway Bill/Bill of lading
- Evidence that consideration was received by the customer(s)
VAT Handling of Imports
Goods and services that come from out of the country are categorized as imports. Whenever services and goods are imported by a VAT registered business, VAT shall be charged directly by the government.
VAT RCM (Reverse Charge Mechanism)
VAT RCM refers to cases in which the person responsible for paying VAT to the authorities isn’t the seller of the goods, but the receiver. The normal case for paying VAT (where the VAT registered business is accountable for paying VAT) is known as Forward Charge. RCM and forward charge are the same in every other aspect, the only difference between the two is the shift in accountability for paying VAT to the government.
The purpose of RCM is to ensure that Value Added Tax is collected on relevant supply and goods even if the provider isn’t a taxable person. The following supplies are taxed according to RCM:
- Specific services and goods for business reasons that have been imported
- Supply of refined and crude oil
- Distribution of hydrocarbons for resale activities
- Supply of unprocessed/processed natural gas
- Provision of services and goods by someone who does not have residency in the country
- Supply of energy in any form
If certain conditions are met, taxation on the supplies listed above will be implemented on the basis of RCM. In such cases, the buyer needs to make a statement of their input and Output VAT as well.
Requirements for VAT Compliance
VAT registered businesses are made responsible for accounting and reporting their VAT obligations and entitlements. This is why it’s important for businesses to know their VAT requirements:
- Businesses that exceed the set threshold for Value Added Tax registration
- Submitting VAT return files in a period determined by the government
- Paying any VAT that is due on a date specified by the government
- Maintain adequate documentation of a business’s transaction records. The major documents required by a company for documenting their VAT collection include:
- Tax invoices that were issued in sales dealings
- Tax invoices that were received when services or goods were purchased
- Documents of imports and exports
- Supportive documents for relevant vendor payments
- VAT return files and their backup data
- Contracts made with customers and vendors
- Records of the business’s inventory
- Evidence for VAT payments
- Debit notes and credit notes
- Figures in a taxable person’s tax returns must be reconcilable with its accounts
- All registered businesses have to keep accounting records of their transactions and relevant supporting data for at least 5 years. Registered businesses operating in the real-estate industry are required to maintain their accounts for at least 15 years.
A tax group is basically a collection of more than one taxable person. Taxable persons can form a tax group if they meet the following criteria:
- Tax group parties should have relations with one another
- Each party in a tax group must have a fixed institution in the country
- At least one person who is part of the business activities in a tax group should maintain control over the other members.
Designated zones are areas where businesses enjoy various incentives from the government that help them grow. One aspect of designated zones is tax leniency. In order for an area to qualify as a designated zone, the following conditions need to be met:
- They should be situated in a defined geographical area
- Customs controls and security measures are essential to make sure that things and people going in and out of these zones are monitored
- Presence of internal control processes for the storage and goods processing in the zone
- The authority operating the zone needs to meet the government’s requirements
Cash Flow Management
In order to meet deadlines set by the government, VAT registered businesses should make an effort to manage their cash flows. Improving cash flow efficiency will help them in their record keeping as well.
Businesses operating in this industry will have a hard time managing their cash flows in regard to VAT compliance. Special effort will be needed to make sure that their VAT compliance systems are able to meet legal requirements.
Businesses dealing in industrial products should keep the following in mind:
- Transactions with other businesses that are required to pay VAT.
- The effect of Value Added Tax on the prices presented to the end-user.
- Invoicing requirements as outlined by VAT laws.
Financial Services Sector
Any kind of financial service that is not provided against a stated amount becomes excused from VAT. The same holds true for life insurance since it too is counted as a financial service. Registered businesses operating in this sector should keep the following in mind:
- Proper accounting treatment for services provided with VAT requirements kept in mind.
- Proper categorization of all claims made for VAT collected on services or goods purchased. VAT imposed through RCM should be counted as well.
- Methods to be formulated and implemented for recovering VAT from services that have been given to customers.
- Consider the benefits of outsourcing tax related activities to a third party in order to improve compliance.
Telecommunications businesses must think about how to report and account for VAT since these companies are often providing services to individuals and companies. These are the aspects that telecommunications businesses should consider:
- Assess VAT treatment for services such as data roaming and hubbing being provided in other countries
- Terms and conditions for pre-paid and post-paid services should be revised in order to align them with VAT requirements
- Considering the effect of VAT on pre-paid plans that aren’t completely used.
- Determining the effects of VAT on services being given to customers using 3rd party platforms.
Retail businesses need to take invoicing and pricing of supplied products into consideration. They also need to figure out how will the categorization of their sales be affected by VAT compliance. Promotion based schemes such as vouchers can result in complicated implications with VAT compliance.
The following are some of the key factors that retail businesses need to consider:
- Review of payment modes with vendors and customers to manage VAT related cash flow
- Review of pricing procedures to ensure it doesn’t seem as if the business is overcharging its clients/customers while complying with VAT laws.
- Appropriate handling of advance deposits and payments while keeping VAT regulations in mind.
There are various other elements that businesses for various industries should keep in mind:
- VAT compliant invoicing
- Maintenance of a business’s transaction records and relevant requirements
- Franchise income handling
- Trade and security deposit handling
- Rules related to price display
- Rounding offs
- Income from miscellaneous sources
- Arrangements for buybacks
- Stock transfer related transactions
- Discounted sales
- Complementary items supplied to customers along with the main product being sold
- Service contract sales
- Extended warranty sale
- Cross charging from related parties
- Transactions involving the exchange of goods
- Rebate received
- Capital costs on establishing outlets and shops for product distribution
How can Push Digits Help You?
Push Digits Chartered Accountants is a highly reputable Global Audit and Tax Consultancy Firm. The agency has a vast amount of experience in its field, having catered to clients from across the world. Push Digits’ VAT consultants can help taxable persons perform detailed audits that can help them accurately prepare tax returns. Push Digits’ team consists of personnel who can provide industry related tax services as well.
Helping You Implement VAT Systems for Complying with VAT Requirements
Businesses need to be aware of a plethora of rules, processes, and procedures in order to comply with VAT laws. We can help you develop the perfect VAT system by understanding how your business works and what VAT laws apply to you. We work closely with our clients and help them come up with proper VAT complaint processes.
We breakdown our approach into the following points:
- A thorough analysis of the client’s existing processes and systems
- Identification of crucial areas that shall be impacted the most by VAT implementation
- Review of crucial documents and assistance in updating them to meet VAT requirements
- Training client’s staff to bring them up to date with VAT regulations and laws
- Helping the client restructure their procedures and transactions in order to meet VAT compliance
- Guiding clients in updating/restructuring their IT systems
- Giving advice on how can the client register for Value Added Tax, VAT rollout, preparation, and tax returns
- Ongoing support after VAT implementation has been completed
Topics covered in our Training and Awareness VAT Implementation Programs
We conduct awareness programs that share useful information regarding VAT implementation. Our programs are useful for accountants, directors, and other staff members wanting to gain practical knowledge about VAT regulations and their impact on their company.
We also arrange training sessions for VAT that educate our clients on a broad range of topics relevant to Value Added Tax implementation. Our training programs are great because they include real-life situations and sessions where you can have your questions answered.
Details of our Value Added Tax Implementation Services
Assessment of Existing Business Systems and Processes
We examine your current procedures and develop a detailed understanding of how your business works. This helps us come up with bespoke VAT implementation solutions for your business.
Effects of Value Added Tax on Your Business
Our VAT specialists carefully analyze the impact of Value Added Tax implementation on your business and then we report these consequences to you. This helps our clients come up with a better plan of action as they go through VAT implementation.
We provide guidance as our clients go through the process of registering for VAT.
Delegation of Duties Regarding VAT Implications
Companies need to delegate VAT activity related duties amongst their staff in order to improve and maintain business performance. We help businesses figure out what’s the best way to delegate these duties amongst their staff. Our guidance helps businesses develop a complete hierarchy for their VAT implementation team.
VAT Compliant Accounting Systems
Our team helps guide you on what software solutions can help improve your VAT reporting capabilities. We can help your IT staff prepare for the implementation of the right software solutions.
VAT Return Filing
We can help you prepare all the documentation needed for filing your tax return. Our expertise also ensures that you meet all the deadlines without making any mistakes.