G10 ACC - VAT. Grade 10 Accounting Notes SET 1: TAX VAT. Name: J. Cansfield Page 1 of 14

Transcription

1 Grade 10 Accounting Notes SET 1: TAX VAT Name: J. Cansfield Page 1 of 14

2 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 J. Cansfield Page 2 of 14

3 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 R 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. J. Cansfield Page 3 of 14

4 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. VAT accounts for about 27% of total tax revenue/income. 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. J. Cansfield Page 4 of 14

5 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. J. Cansfield Page 5 of 14

6 VAT is a tax paid by everyone, rich or poor, whenever they buy anything. The government introduced VAT on 29 September 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 was introduced in South Africa in September Originally it was 10%, but increased to 14% April 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. J. Cansfield Page 6 of 14

7 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 a form of tax in at least 50 countries around the world. 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. J. Cansfield Page 7 of 14

8 REGISTRATION AND PAYMENT PROCEDURES It is compulsory for all businesses with sales (turnover) in excess of R 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 R 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 R 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 R and another business with sales of R , you will have to register as a vendor because your combined turnover exceeds R 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 R , and a restaurant with yearly sales of R He must register as a VAT vendor because the sales of the two businesses combined are R , which is more than R 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. J. Cansfield Page 8 of 14

9 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 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. 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. J. Cansfield Page 9 of 14

10 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 White bread Breakfast cereal Petrol Chips Tinned jam Rice Maize meal/mealie meal Carrots Milk powder Lentils Zero-rated J. Cansfield Page 10 of 14

11 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. J. Cansfield Page 11 of 14

12 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. J. Cansfield Page 12 of 14

13 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 R I bought soap and material, which cost R plus R VAT. I also paid R 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. J. Cansfield Page 13 of 14

14 CHECKLIST Skills 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 Requires more attention Yes - proficient Complete 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. J. Cansfield Page 14 of 14