Value Added Tax and Reporting in Accounting

Transcription

1 Available online at Reef Resources Assessment and Management Technical Paper ISSN: RRAMT Vol. 40, 2014, 1 Value Added Tax and Reporting in Accounting Mahdi Haghighat Department of Accounting, Omidiyeh Branch, Islamic Azad University, Omidiyeh, Iran Abstract Value added tax is a modern tax which has been known as one of government s important revenue, in past decades. From 2008 with implementation of value added tax law in Iran, this subject has been discussed and investigated by academic and financial circles, as one of the topics of the day. In this study, the topic of value added tax and its reporting in accounting have been considered. In this paper, after a comprehensive definition of value added tax, the principle of implementation of value added tax, types of it, different methods of its calculation and then the advantages and disadvantages of value added tax has been investigated. Also, the method of financial reporting of value added tax and its accounting records are reviewed. It seems that correct implementation of value added tax law can help greatly to improve the technology of tax system and tax accounting Published by RRAMT France Ltd. Keywords: value added tax, invoice method, financial reporting of value added tax; 1. Introduction Value added tax is a modern tax that during past decades has been known as one of the most important sources of revenue for governments. For the first time this type of tax was suggested by German merchant Von Siemens in 1918, to overcome the problems of Germany s revenue shortage after first world war. From 1945, Germany, Brazil, France and Denmark are among the first countries that introduce this tax in their tax system and now more than 140 countries in the world use this tax system and this type of tax has become the most important source of tax revenue for most of the developing countries of the world [1]. In Iran, for the first time, in 1987 the bill of value added tax law went to the parliament and after the approval of 6 articles, due to conditions of war and the implementation of the policy of prices stability, it was returned to the government. In 2000 an independent bureau was established in tax affairs organization, for the law of value added tax. In 2004 expediency council approved the establishment of this tax system and the generalities of this bill was reviewed by the parliament and in 2006 parliament according to article 85 of constitution, gave the approval of it to the commission of economic affairs for the trial implementation of the law. Finally, value added tax law was passed by the parliament in May 6, 2008 and in the same year was approved by the guardian council and was submitted to the ministry of economic affairs and finance by the president for implementation [1]. 2. Value added tax 2.1. Concept of value added tax

2 At the beginning, the concept of value added is reviewed which has been mentioned in article 3 of value added tax law: value added is the difference between value of goods and services supplied and value of goods and services purchased in a specified period [2]. There are different definitions for value added tax, a few of which as example is mentioned: Abdi and et al (2008) consider value added tax as a type of consumption tax, which is received in the continuum of imports, production and distribution, based on a percentage of value added of taxable goods and services. In other words, value added tax is the difference between tax received for selling products and the paid tax for purchase of raw materials for production of goods which is paid by the taxpayer to the tax affairs organization, or if having the right of return, it is returned to the taxpayer by tax affairs organization [3]. So, it can be said that value added tax is a type of multistage sales tax, which is received through different stages of production continuum or services provided. In fact, this tax is a type of multistage sales tax which exempts the intermediary goods and services from tax (Bozorg asl, 2008) [1]. According to these concepts, the following comprehensive definition of value added tax is presented: Value added tax is a type of consumption tax which is paid and received in several stages; this tax which is calculated in the continuum of imports, production and distribution based on a percentage of value added of taxable goods and services and causes the purchase of intermediary goods and services to be exempted from tax payment Payer of value added tax, tax rate, tax period and its exemptions According to article 1 of value added tax law, supply of goods and services in Iran and also their imports and exports are liable to the rules of this law. Therefore, all those active in economy, including true persons and legal persons who sell, exports or imports goods and services that liable to the value added tax law and according to the rules that tax affairs organization has announced, have to register, are considered taxpayer [2]. According to the articles of this law, tax rate for the first year of implementation of this law (2008) was %3 from which %1.5 is for the general rate of the tax of goods and services (which is deposited in the treasury account) and another %1.5 is related to the general rate of duties of goods and services (duties of municipalities and village councils). In addition to that, it was agreed that in the first phase of implementation of this law till the year 2015, tax rate %1 per year is increased, from which %0.7 is considered to be tax on goods and services and another %0.3 be considered the duties of municipalities and village councils. For value added tax purposes, each solar year has been divided in to four three-month tax periods. If the start or end of the activity of the taxpayer is during a tax period, the time of the taxpayer during that period is considered a tax period [2]. Unprocessed agricultural products, bread flour, bread, meat, sugar cubes, sugar, rice, grains and soybean, milk, cheese, vegetable oil and babies powder milk, book, the press, notebooks and all types of print, writing and press papers, hand-woven rugs, animals feed, public transportation services in cities and between cities, on roads, rails, air and sea, all research and educational services, bank and credit services, and many other goods and services are not included in this law, according to articles 12 and 13 of value added tax law. Although, some of the products that are consumed more like milk products except for milk and cheese, water, gas, electricity and etc are liable to value added tax [4]. 3. Origin principle and destination principle in tax system Value added tax can be implemented according to two principles of origin and destination: A) In origin principle, value added tax is applied on the value added on all goods and services that are produced in a country. 700

3 B) In destination principle, value added tax is applied on the value added on all goods and services that are consumed in a country. The important point in this issue is the way this tax treats the categories of exports and imports. It means that, in destination principle exports are exempted from the value added tax, because according to this principle, value added tax is for all goods and services that are consumed inside the borders of a country, while exported goods and services will be consumed in another country (destination country). Therefore, according to destination principle, exports will not be liable to value added tax, but imports are liable to this tax, because they will be consumed inside the country. But in origin principle, exactly opposite the destination principle, imports are exempted and exports are liable to this tax. Therefore, in order to encourage exports, destination principle is used. So, the best choice for implementation of value added tax system is through the use of destination principle [3]. 4. Types of value added tax Generally, value added tax is three types that include: 4.1. Value added tax of the production type If in the general concept of value added tax of the production type the origin principle is used, it includes all expenditure in gross domestic product (except government expenditure for wages which can t be put under the cover of value added tax). So, it can be said that the base of value added tax of the type of production is the sum of all expenditure in gross domestic product excluding government wages expenditure. In value added tax of the type of production, the general tax is applied on the sales, so this type of value added tax can be applied on consumption and capital goods. In this method, capital goods and their depreciation are not exempted from tax. In other words, it can be said that, for purchasing capital goods, they do not get tax credit, for this reason, this tax discourages the motive for investment Value added tax of the consumption type In value added tax of the consumption type, in addition to depreciation, expenditure related to capital goods also become excluded from inclusion of tax base. In fact, after reducing capital expenditures of production, what remain is equal to the value of consumer goods which have been produced. Value added tax system in member states of European Union is of this type of tax. Because in this type of tax, the capital goods are exempted from tax, it creates more motives for investors; therefore, some of the developing countries are also inclined to this type of tax. Also in practice, using this method compared to other two methods, is easier Value added tax of the revenue type In value added tax of the revenue type, depreciation is not included; so, it includes net capital expenditures. The base of this tax is the sum of paid revenue to the factors after deducting government wages expenditure. Generally, in this type of value added tax, the overall tax base is proportional to the revenue of production factors. Value added tax of the revenue type is different from value added tax of the consumption type, because in the former, the entity does not deduct depreciation; but in the latter, the entity is authorized to deduct the gross investment. Therefore, value added tax of the revenue type as the difference of gross investment and depreciation, is more than value added tax of the consumption type. 701

4 4.4. Comparison between types of value added tax From the three types of value added tax, value added tax of the production type creates the highest tax base and value added tax of the consumption type creates the least tax base. Because value added tax of the production type includes the gross purchase of capital goods (without exclusion of depreciation), it creates obstacles against investment. Among the three mentioned types, value added tax of the consumption type which creates the least tax base, is a general consumption tax and most countries usually choose this type. In fact, using this type needs the highest tax rate for creating a desirable revenue return and for this reason, some of the countries try to expand the tax base of value added tax of the consumption type through making taxable a part of capital goods [1]. 5. Calculation of value added tax 5.1. Calculation methods of value added tax For calculation of value added tax, two methods of cumulative and subtractive are used both directly and indirectly. With due regard to the calculation of value added tax in four methods of direct and indirect cumulative and subtractive (which will be discussed later), it can be concluded that in all four methods, the same amount is received for value added tax Method of direct cumulative Value added tax = t (wages + interest + rent + income + depreciation) t = rate of value added tax In this method, tax rate is multiplied by the sum of factors of value added of an entity, to specify the amount of value added tax. This method, because of difficultly of separate calculation of each factor (wages, interest, rent, income and depreciation) for the entity, no value added tax system of the countries of the world uses it Method of indirect cumulative Value added tax = t (wages) + t (interest) + t (rent) + t (income) + t (depreciation) t = rate of value added tax In this method, tax rate is separately multiplied by each value added factors and then all of the amounts are added together and the amount of value added tax is specified. Like method of direct cumulative, this method also is not so much used Method of direct subtractive Value added tax = t (sales - purchases) t = rate of value added tax In this method, tax rate is multiplied by the different between the amount of sales and purchases of an entity and the amount of value added tax is specified Method of indirect subtractive Value added tax = t (sales) t (purchases) t = rate of value added tax In this method, tax rate is multiplied by each one of the sales and purchases and the result of this multiplication is deducted from each other. 702

5 In value added tax literature, the indirect subtractive method is known as invoice method. The reason of this naming is, that in this method, each entity at the time of its purchase, value added tax payable on the factors of production has to be paid, that the tax is written in the purchase invoice. In the end, also at the time of product sales, the received value added tax for its products is calculated and is added to the sales price and like before (purchases) received value added tax that resulted from sales of its goods and services is written in the sales invoice in a separate column. Finally, at the time of preparing its tax return, it reduces received value added tax that resulted from sales, from paid value added tax on production factors, and reports its difference as payable value added tax to tax affairs organization. In this method, paid value added tax on purchases, is considered as tax credit for the entity, and it is based on this tax credit that the taxpayer can deduct paid value added tax on production factors from received value added tax that resulted from sales. But it is possible that the sum of this equation be a negative amount, this means that the amount of tax credit of entity is more than the amount of received value added tax from sales, therefore, the entity can regarding this credit surplus request for returning it; it means it can request the tax affairs organization to return this credit surplus to it or postpone this credit surplus to next coming tax periods, as its credit. This surplus of tax credit is obtained more regarding exports or increase of investment in a specific period for entity. It is totally clear that this tax system is after reduction of tax burden on production and investment at the economic level. This method is the simplest method for calculation of value added tax which is used in all countries that implement this tax system [3] Calculation methods of value added tax in invoice There are two methods for calculation of value added tax in invoice from which the taxpayer is free to choose; on the condition that it specifies clearly the amount of tax and the related duties: Calculation of tax in addition to the price of goods and services In this condition, one is obliged to explain to the consumer that the price of the goods has been calculated in addition to the tax. Also it is necessary that the net price of the goods and the amount of duties be mentioned separately in customer s invoice and in accounting journals. Tax and duties are calculated as follows: Tax and duty = net price (after deducting discount) [rate of tax and duty (rate of tax and duty + 100)] Calculation of tax separated from goods and services In this method, the main price of goods and amount of tax and duty are separated from each other and this separation is obvious in customer s invoice and in accounting journals. Calculation of tax and duty in this method is as follows [3]: Tax and duty = net price (after deducting discount) (rate of tax and duties 100) 5.3. Calculation method of value added tax in tax return For observing the law and its desired implementation, calculation of value added tax is down according to accepted accounting standards and using the invoice method (method of indirect subtractive). In practice, it is enough for each payer of value added tax to do the following operation: A) When purchasing goods or receiving services: It is necessary for the taxpayer in addition to the price of goods and services, to pay the multiplication result of value added tax in the price of purchased goods to the seller. (In fact, the paid amount is the tax credit of the taxpayer and shows his claim from tax affairs organization.) B) When selling products or offering services: In addition to the price of the product, the taxpayer must receive the multiplication result of value added tax in the price of sold goods, from the purchaser of the goods or receiver of the services. (This amount which is received in addition to the price from the purchaser is considered to be the seller s debt to the tax affairs organization.) 703

6 At the end of each tax period of value added tax, the taxpayer has to pay the difference of received value added tax amount at the time of sales of products with paid value added tax at the time of purchasing the products to the tax affairs organization. If paid value added tax for the taxpayer s purchases are more than received value added tax for his sales, he can request the reclamation of the extra payment of value added tax from tax affairs organization [3]. 6. Financial reporting of the value added tax 6.1. Theoretical basics of reporting Financial reporting of value added tax is very simple. Therefore codification a separate accounting standard for value added tax is not necessary, because in other Iranian accounting standards, necessary methods have been foreseen. According to paragraph 9 of number 3 Iranian accounting standards, the amount of money that is received on behalf of the third party (such as some of the taxes), will not result in increase of equity and therefore it is not considered to be operation revenue. According to this paragraph, value added tax and also received duties from the customers is not identified as revenue. These amounts are registered as liability (payable tax) at the time of receiving. If the paid taxes for purchase of goods and services are returnable or tradable, it should not be included in the cost of goods and services. These amounts are registered as receivables (receivable tax) at the time of payment, but if the value added tax is not returnable and tradable, is considered as a part of cost of purchased goods and services. According to note 5 of article 17, this type of taxes are considered as part of acceptable expenses in direct taxes law. According to note of article 4, the assets that are purchased or produced for use are also liable to tax. Therefore, regarding these assets, value added tax is a part of cost of assets. Liabilities and receivables related to the returnable taxes, due to the existence of offset legal right, are offset together, according to paragraph 34 of standard number 1 of the method of submission of financial statements [5] Accounting records Received taxes for the sales of products which are under the commitment of the taxpayer (that taxpayer has to deposit it in the treasury account), have to be registered in the payable accounts of value added tax. Paid taxes for purchase of raw materials and intermediary goods and services (that taxpayer receives it from the government), have to be registered in receivable accounts of value added tax. Receivable tax: It is a tax that the taxpayer has paid to the other taxpayer at the time of purchase of goods and services from him. In fact, the taxpayer claims this tax from tax affairs organization and must receive it. Payable tax: It is a tax that the taxpayer has received at the time of sales of goods and services to other taxpayer or the final consumer. In fact, the taxpayer has to pay this tax to the tax affairs organization [3]. Receivable tax Tax of purchase and imports of taxable goods Tax of purchase return Payable tax Tax of sales return Tax of sales of taxable goods 704

7 7. Advantages and disadvantages of value added tax 7.1. Advantages a) Value added tax prevents to pay a multiple tax from the final consumer of goods and user of services [3]. b) In many countries, this tax in addition to providing social justice compared to other taxes and without destroying the motive of investment and production, is used as a new source of revenue for increasing government s revenues. c) Taking value added tax can be considered a stable and flexible source of revenue for government and can have an important role in changing consumption pattern toward reduction of willingness to consumerism and luxury. d) Since income tax as one type of direct taxes has always been considered as a preventive factor from producer s view, using value added tax can cause the decrease of tax pressure on production sector and its logical transfer to the consumer sector. e) Value added tax through specifying zero rate for exports and return of paid tax for inputs, will cause the encouragement of exports sector and through this will cause the increase of currency revenues of the country. f) Since value added tax system is a self executing system and all the taxpayers play the role of tax agents, expense of its collection is lesser compared to other taxes. g) Because the rate of this tax is fixed and its calculation is easy, its certainty time is very short and it does not have the problems related to length of certainty of income tax and wealth tax. Therefore delay in collecting tax revenues will reach the shortest possible time. h) Implementation value added tax system causes reduction of tax evasion, because non-paying the tax by seller, will cause the involvement of his goods purchaser for considering the related tax. Benefits of one side will cause the losses of the other side and if the control system is effective, tax evasion will be reduced to the lowest possible level. i) Considering the fact that in this tax, the taxpayers for using tax credit are obliged to submit invoice, the background will be prepared for the automatic identification of amount of dealings of the taxpayers. As a result, a complete information system from dealings and business transactions is established, which in addition to transparency of dealings and economic activities, causes the easiness of levying other taxes like income tax and jobs tax. j) Since value added tax is a modern tax, its implementation can help greatly in improvement of technology and efficiency of office automation in the tax system and tax accounting [1] Disadvantages a) Descending effect of value added tax: Because value added tax is a consumption tax and usually is applied with fixed rate (non-progressive) on taxable goods, therefore, low-income people (poor people) have relatively more tax pressure. Therefore when in a country this tax is applied for the first time, governments and economic policy makers probably will be worried because of its descending nature. But the descending effects of value added tax compared to other similar taxes, especially sales tax, in different stages are very lesser. b) Implementation problems of value added tax: The most important problems are as follows: 1) Method of dealing with retailers (little jobs), 2) The way of dealing with farming food materials, 3) Method of action regarding capital goods, 4) Problems of tax collection from services (such as banks and insurances). Among the cases that critics of value added tax put forward is the inflationary effects of implementation of value added tax. While investigations and studies show that inflationary effects of this tax is about %3 which is created in the first or second year of its implementation and will not have long term effects on creation of inflation [1]. 8. Conclusion From 2008 with implementation of value added tax law in Iran, this subject has become a hot topic of the day and has been discussed and investigated in academic and financial circles. According to different definitions which have 705

8 been presented regarding value added tax, the following comprehensive definition of value added tax is presented: Value added tax is a type of consumption tax which is paid and received in several stages, this tax which is calculated in the continuum of imports, production and distribution based on a percentage of value added of taxable goods and services, and causes the purchase of intermediary goods and services to be exempted from tax payment. With due regard to what has been offered in this study, it seems that correct implementation of value added tax law can help greatly to improve the technology of tax system and tax accounting. Acknowledgement I would like to greatly thank my dear wife Mrs. Marziyeh Kheirandish who has helped me in compiling and editing this paper. References 1. Zare moqaddam, A., Ghani, M. (2009). Value added tax (opportunities and challenges). Journal of Chamber of Trade, 496, Iranian Islamic Parliament (2008). Value added tax law. Passed on May 6, Abdi, M. R., Kobari, R., Bovard, A. (2008).Accounting value added tax. (1st ed.).tehran: Ganje Ma refat, (Chapters 1&3). 4. Arbab Soleymani, A. (2008). Basics of value added tax. Journal of Hesabdar Rasmi, 2, Bozorg asl, M. (2008). value added tax and its financial reporting. Journal of Hesabres, 41, Noravesh, I., Shirvani, R. (2002).New method accounting dictionary (english-persian). (3rd ed.).tehran: Iman. 706