1. VALUE ADDED TAX ACCOUNTING
Chapter six
VALUE ADDED TAX ACCOUNTING

2. CHAPTER CONTENTS Overview of Value Added Tax
Components of Value Added Tax
Basic Legal provisions of VAT in Ethiopia
Accounting for VAT
VAT Declaration

3. Overview of Value Added Tax
VAT is a consumption tax charged on the value added to goods and services by importers, manufacturers and traders at each stage of the production and distribution process.
VAT is ultimately borne by final consumer
it is a charged on the added value(incremental value or newly created value of goods and services)
The value added is the difference between the receipts (from the sale) and payments made to various factors of production (land, labor, capital and organization)

4. VAT related terms
Taxable Supplies/transaction: -goods and services on which VAT is charged.
Exempted Supplies: -goods and services on which VAT is not charged.
Mixed supplies: -occurs if a mixture of goods and/or services is invoiced together at a single VAT inclusive price.
Taxable person: -a person who supplies taxable goods and services and liable to be registered for VAT.
VAT Exclusive price: -purchase or sales price before VAT.
VAT Inclusive price: -purchase or sales price including VAT.

5. components of VAT
Input VAT
is the VAT paid when taxable goods and services are purchased.
 Output VAT
is the VAT collected at the time of sale of taxable goods and services.
 If OVAT > IVAT = VAT Payable/Liability
If OVAT < IVAT = VAT Credit/Refundable

6. Legal Provisions on VAT in Ethiopia
According to Value Added Tax Proclamation No. 285/2002 and Value Added Tax Regulation No. 79/2002,
VAT is payable on taxable supplies made in Ethiopia by a taxable person in the course or furtherance of the taxable activity during an accounting period.
Course or furtherance is an activity undertaken to develop, advance and progress the taxable activity by a taxable person
The Accounting Period is a calendar month.

7. VAT Registration in Ethiopia
I. Mandatory/Obligatory registration
if the annual turnover/taxable transaction exceeds or likely to exceed Br.500,000.
II. Voluntary Registration
even if the annual turnover does not exceed Br.500,000, a person can apply to be registered for VAT if the person supplies more than 75% of its goods and supplies to taxable persons.
Note
Input VAT is recovered for VAT registered persons only.
The Value of a Supply is the amount on which the VAT charge is based. it is the price before VAT charge by a supplier.
Turnover related to exempt supplies is not to be included in compulsory VAT registration.
The Base for registration is the gross value/turnover of taxable supplies

8. Classification of supplies for VAT
Zero-Rated Supplies
Supplies on which VAT on supply is charged at 0%.
Are part of the VAT system
The company supplying zero rated supplies must register for VAT.
The firm can claim the Input Tax Credit on purchases either it is domestic or import.
include:
export of goods and services
rendering of international transportation services
the supply of Gold to NBE
A supply by a registered person to another registered person in a single transaction 0f substantially all of the assets of a taxable activity or an independent functioning part of a taxable activity

9. Classification of supplies- Cont’d
B) Exempted Supplies
Supplies on which VAT is NOT chargeable
Input VAT is considered as part of the cost of the purchase.
The supplies are outside of the VAT system
Persons supplying only exempted supplies cannot register for VAT.
Includes
rendering of educational services, health services, financial services, religious services,
the supply of electricity, water, and kerosene
the provision of transport
the import or supply of books and printed materials
the import of gold to be transferred to the NBE
C) Standard Rated Supplies
Supplies on which VAT is charged at a standard (15 %) rate.

10. Imposing VAT VAT is levied on: The value of a taxable import is,
Every taxable transaction by a registered person; and
Every import of goods, other than an exempt import
The value of a taxable import is,
CIF plus the sum of duties and taxes (Custom Duty and Excise Tax) payable upon the import, excluding VAT and income tax withholding.
The rendering of services incidental to an import of goods is part of the import of goods.

11. Example: Consider the following information for Hawi Plc.
VAT inclusive purchase price of inputs Br.115,000
VAT Exclusive selling price of outputs ,000
Required:- determine the following:
the cost of the goods to the company
the VAT to be paid/reclaimed assuming that:
the outputs are standard rated
the outputs are zero rated, and
the outputs are exempted.

12. Exercise
Tabor Ceramics Share Company made taxable purchases of Birr 230,000 and Birr 138,000 taxable import. It also made taxable sales of Birr 345,000.
Required: Determine the VAT Liability or VAT Refund assuming that the prices are VAT inclusive and a VAT rate is 15%.

13. Adjustment on Taxable Transaction value
Adjustment of the value of a Taxable Transaction is allowed where:
The transactions cancelled;
The nature of the transaction is changed;
The previously agreed consideration for the transaction is altered
The goods or services are returned in full or in part to the registered person.

14. Input Tax Credit
The amount of VAT that is creditable is the amount of VAT paid by a registered person on input or import
Where only a part of the supplies made by a registered person are taxable transactions, the tax credit is determined as follows.
For a supply/import received to make taxable transactions, the full amount of tax paid on them shall be allowed as a credit
For a supply/import received for the making of taxable and exempt outputs, the rules of apportionment of the credit shall be determined by a directive to be issued by ERCA

15. VAT Refund
If at least 25 percent of the value of a registered person's taxable transactions is taxed at a zero rate, the tax authority shall refund the amount of VAT
For other registered persons, if the amount of VAT applied as a credit in excess of the amount of VAT charged for the accounting period, it is to be carried forward to the next five accounting periods
Any unused credits shall be refunded by the tax authority within a period of two months

16. Record Keeping
A registered person or any other person liable for tax under VAT proclamation shall maintain for 10 years in Ethiopia the following:
Original tax invoices received by the taxable person,
A copy of all tax invoices issued by the taxable person,
Customs documentation relating to imports
Accounting records; such As VAT Invoice, VAT Ledger, Purchase Register, Sales Register

17. Recording VAT Related Transactions
I) Recording Purchases
Credit the amount owed to the purchaser for the purchase plus VAT.
Purchases are charged exclusive of VAT.
The VAT element is debited to the VAT Account representing FIRA-VAT Department as a debtor
II. Recording Sales
The sales are debited to Debtor or Cash Account for the amount of the sales plus VAT
The sales amount is credited to sales account exclusive of VAT
The VAT element is credited to the VAT Account representing FIRA-VAT Department as a creditor.

18. Recording VAT Transactions- Example
Lubanja PLC, a VAT registered merchandising company, uses the perpetual inventory system. Selected transactions for the month of Sene 1998 are listed below.
Sene 7 Purchased merchandises for cash from YBZ PLC for Br.6,500, subject to VAT for 15%.
Sene 14 Purchased merchandises on account from YBZ PLC for a 15% VAT inclusive price of Br.18,400.
Sene 20 Sold merchandise on account to United PLC at VAT exclusive price of Br.10,000. The VAT rate is 15%.

19. Example- cont'd Required:- Record the above transactions.
Sene 22 Sold merchandise for cash to United PLC at VAT inclusive price of Br.23,000. The VAT rate is 15%.
Sene 24 Sold zero rated merchandise on account to United PLC for Br.25,000.
Sene 26 Imported merchandises for the CIF value of Br.81,500 (i.e., 60,000+7,500+14,000). The excise tax and custom tariff paid for those merchandises were Br.61,125.
Sene 28 Sold merchandise for cash to United PLC at a 15% VAT inclusive price of Br.92,000.
Required:- Record the above transactions.

20. End of chapter