VAT Explained: A Simple Guide

Introduction:

VAT is an indirect tax levied on the consumption of goods and services. It is a multi-sage tax, meaning it is collected at each step of the process.

How does VAT Work?

VAT is collected in 3 different forms:

• Businesses as Tax Collectors:

Businesses act as tax collectors, whenever they sell or produce a good, they charge the VAT tax on that particular product. Hence, as a customer you are implied to pay VAT on a good or service.

This includes:

1. A charging VAT: When businesses sell a good or service, they are required to add the VAT price

2. A collecting VAT: The customer pays for the product, including the tax.

3. Remitting VAT: The business then separates the profit from the tax on the product and gives it to the government.

• Input Tax Credit:

Businesses can claim a credit for the VAT they paid on goods and services they purchased for their business. This is also known as Input Tax Credit (ITC)

How ITC works:

        a) Purchase VAT: When a business buys any good or service, they pay the VAT to the supplier

        b) ITC Claim: The business can then claim the ITC equal to the VAT paid on these goods and services

By claiming ITC:

1. Businesses can reduce the claim on their overall VAT liability

2. It helps ensure that VAT is a neutral tax meaning it does not unfairly burden any industry.

3. It promotes efficiency by encouraging businesses to purchase goods and services efficiently.

• Output tax vs Input Tax:

Output Tax: This is a VAT tax that businesses collect from the customers when it sells goods or services. It is calculated as a percentage of the total sales value.

Input Tax: This is a VAT that a business pays to its suppliers when it purchases any good or service for its business operations. Similar to output tax, it is calculated as a percentage of the total purchase value.

The difference: The difference in between both output and input lie on the VAT liability.

If output tax is greater than Input: Business has a VAT liability and must [ay the difference to the government.

If input tax is greater than output:  The business become entitled by the government to get a VAT refund.