LECTURER: Arvin Ajay Sami LAW601 – Taxation Law VALUE-ADDED TAX LECTURER: Arvin Ajay Sami

OVERVIEW What is Value-Added Tax (VAT) When VAT is applied How to calculate VAT

VALUE-ADDED TAX After 1987 – there was talk of what strategies would be need to boost Fiji’s economy. This tax that was first introduced in 1992 was an outcome of this meeting. Tax on goods and services

VALUE-ADDED TAX VAT was introduced to reduce avoidance and evasion by picking up in the consumption tax net those who would avoid or evade direct income tax.

VALUE-ADDED TAX A consumption tax to penalize those who spend their savings and reward those that keep their savings. Will help reduce the country’s expenditure on imported goods and offshore loans.

VALUE-ADDED TAX Essential feature of VAT – taxes final and intermediate at each stage of production and distribution process through the INVOICE METHOD.

VALUE-ADDED TAX All businesses with a turnover of F$50,000 (increased to F$100,000; 2011 Budget Address) or more in respect supply of goods are required to register with the VAT unit and must charge 15 percent VAT on the price of all the goods and supplied.

VALUE-ADDED TAX Monthly ,quarterly & yearly VAT returns must be lodged with the VAT office and, payments are made by the end of the month following the month of the VAT return.

VALUE-ADDED TAX The following are exempt from VAT: Financial services (banking services, insurance services, dealing in stocks, granting of credit) Rents from residential dwellings Supply of education (including goods and services incidental to education by an educational institution) Donated goods sold by non-profit bodies

VALUE-ADDED TAX VAT is added to all invoices in Fiji. VAT is charged by each supplier in the chain of distribution where goods are sold. VAT is a tax on spending and the rate in Fiji is 15%

VALUE-ADDED TAX Paid and borne by the final consumer and is designed to tax spending by consumers evenly and fairly It is NOT a tax on sellers of goods and services. Sellers will simply collect the VAT on Government’s behalf.

Analyzing the effects of VAT on the Accounting equation A = L + P (Assets = Liabilities + Proprietorship Sold goods for cash, $2,000 plus Vat 2,000 x 15% = $300 $300 is VAT portion to collect for Government

Analyzing the effects of VAT on the Accounting equation A = L + P (Assets = Liabilities + Proprietorship Sold goods for cash, $2,000 plus Vat Total cash collected =2,000+300=$2,300

Effect on the Accounting equation Assets = Liabilities + Proprietorship $2,300 = $300 + $2,000 (cash) = (VAT) + (sales)

Example AB (a wholesaler) sold goods of $1,000 to XY (a retailer) and charged 15% VAT. The invoice will be shown as follows: Cost of goods $1,000.00 VEP + VAT (15%) $ 150.00VAT Total invoice $1,150.00VIP

Therefore AB rec’d $150 from XY For AB, the $150 is VAT output (VAT collected) For XY, the $150 is VAT input (VAT paid)

Therefore AB rec’d $150 from XY The end result is that the tax (VAT) is paid by the consumer but collected by the retailer So VAT every dollar the retailer pays at the input stage is recovered from the consumer.

In PRACTICE Because a credit can be claimed for tax input, all VAT is passed on through the distribution chain ONLY the final consumer of the goods and services bears all the VAT tax imposed.

Example 2 Calculate the amount of VAT paid for the following transactions Bought goods for cash, $500 plus VAT Solution: VAT paid = $500 x 15% = $75.00

Example 3 Bought goods for cash, $4,000, VAT Exclusive Price [VEP] Solution: VAT paid = $4,000 x 15% = $600

Example 4 Bought goods for cash, $1,350.00 VIP Solution: VAT paid = $1,350 x 3 /23 = $176.10

Example 4 You will have noticed that instead of multiplying by 15% we have instead Multiplied by 3 and then divided by 23. The reason being – VAT is already included in the amount. We just want to know how much of the gross amount makes up for VAT.

NOTE: VAT paid is VAT INPUT VAT collected is VAT OUTPUT If VAT output > VAT input = VAT payable If VAT input > VAT output = VAT refund

Lets analyze the effects of VAT on the Accounting Equation with one transaction A = L + P Assets = Liabilities + Proprietorship Sold goods for cash, $1,000.00 plus VAT Cost of the goods = $1,000.00

Lets analyze the effects of VAT on the Accounting Equation with one transaction A = L + P Assets = Liabilities + Proprietorship VAT collected ($1,000x 15%) $150.00. Total cash collected =$1,150.00

Effect on the Accounting Equation Assets = Liabilities + Proprietorship +$1,150 = $150 + $1,000 Cash = FIRCA (VAT) + Sales

SUMMARY VEP, plus VAT, VAT exclusive – VAT is not included = multiply by 15% to calculate VAT VIP, VAT inclusive – VAT is included = Multiply by 3 and divide by 23 to calculate VAT VAT collected (VAT output) = add all plus(+) to FIRCA

SUMMARY VAT paid (VAT input) = add all the minus (-) to FIRCA VO is greater than VI = VAT payable VI is greater than VO = VAT Refund