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VAT GUIDE FOREWORD Every country in the world needs revenue to provide health,

VAT GUIDE FOREWORD Every country in the world needs revenue to provide health, education, social services, roads, and a wide range of other facilities for all its citizens. One of the ways Government mobilizes revenue is through taxation and one such tax is a consumption tax called Value Added Tax (VAT). VAT is an indirect tax which was introduced in Zambia on 1st July 1995 to replace sales tax. The advantages of VAT for businesses can be summarized as follows: VAT is largely invoice based and therefore uniform and uncomplicat- ed, offering a sound financial management system with less collection weaknesses. As a result of increased tax compliance, brought about by the ‘self-policing’ nature of VAT, there is less distortion of trade. VAT gives the potential for a stronger home manufacturing industry and more competitive export prices.The input credit mechanism gives registered businesses back much of the tax they pay on purchases and expenses used for making taxable supplies. It is a fairer tax than most General Sales Tax largely because it avoids the ‘tax on tax’ characteristic of most indirect taxes. A wider tax base has resulted in less distortion of trade and a greater sharing, across all sectors of the business community, of the costs of collecting indirect taxes and remitting them to the Government. VAT in Zambia is administered under the Domestic Taxes Division of Zambia Revenue Authority (ZRA). The primary Law relating to VAT is contained in the Value Added Tax Act Chapter 331 of the Laws of Zambia. The subsidiary legislation comprises General Regulations made by the Minister through Statutory Instruments and Administrative Rules made by the Commissioner General through Gazette Notices. The purpose of this booklet is to provide general guidance and it does not replace or amend the law. Further, the guidance is not exhaustive and does not, therefore affect any person’s right of appeal on any point concerning their liability to tax, nor does it preclude any discretionary treatment which may be allowed under the Act. KINGSLEY CHANDA COMMISSIONER-GENERAL CONTENTS PART 1 1.0 Explanation of Value Added Tax (VAT) 1.1 The Mechanisms of VAT 1.2 VAT Computation 1.3 Supplies for VAT Purposes 0.1. Liability to VAT: Taxable & Exempt Supplies 0.1.1. Taxable Supplier 1.4.2 Taxable Supplies 1.4.3 Examples of Taxable Supplies 1.4.4 Exempt and zero-rated supplies 1.4.5 Difference between Zero-rated and exempt supplies 0.1. Imported goods 0.2. Export of goods 0.1. Place of supply 0.1.1. Place of supply of goods 0.1.2. Place of supply of services 1.7.3 Reverse Charge on services supplied to registered suppliers in Zambia by non- resident suppliers 0.1. Tax point -the time when taxable supplies are made 1.8.1 Tax points for particular transactions 1.9 Taxable Value 1.10 Minimum Taxable Values PART 2 2.0 Registration for VAT- Registration Rules 2.1 Businesses making only Zero-rated supplies: Waiver of registration 2.2 Supplies to take into account when calculating taxable turnover 2.3 Effective Date of Registration (EDR) 2.4 Late Registration penalties 2.5 Reclaiming of VAT prior to Registration 2.6 Intending traders 0.1. The obligations of a VAT registered supplier 2.8 Entities to be registered for VAT 2.8.1 Businesses with branches 2.8.2 Group Registration 2.8.3 Special Rules relating To Government Agencies 2.9 Registration procedure 2.9.1 Conditions for cancellation of VAT registration 2.9.2 Effective Date of cancellation (De-registration) 2.9.3 Payment of VAT on assets on hand at De-registration 2.9.4 Applications for De-registration 2.10 Changes not requiring cancellation of registration PART 3 3.0 Claiming back the tax paid on business purchases and expenses - Input Tax 3.1 Restrictions on the Input tax that can be claimed 3.1.1 Business Use/Private use 0.0.1. Three months time limit for claiming input tax 0.0.2. Evidence for claiming input tax 3.1.4 Exceptions on charging of VAT on Imported goods 3.1.5 Input Tax must relate to taxable supplies 3.2 Specific items on which input tax cannot be claimed -Non-deductible items 3.2.1 Telephone and internet services 3.2.2 Motor Cars 3.2.3 Business entertainment 3.2.4 Input tax incurred for the benefit of Directors, employees etc. 3.2.5 Input tax incurred on petrol expenses 3.2.6 Input tax incurred on diesel expenses 3.2.7 Input tax not allowed on construction of dwelling houses for staff 3.2.8 Input tax incurred on electricity expenses 3.2.9 Input tax incurred for purchase of consumables PART 4 4.0 Retailers -Accounting for VAT on supplies made output tax 0.1. Retailers -Concession not to issue invoices for retail supplies 4.2 Restrictions on the concession 4.3 Retailers making mixed supplies 4.4 Retail price to include tax PART 5 5.0 Non-Retailers - Accounting for VAT on supplies made 0.1. Non-Retailers -The invoice basis 0.2. Non-Retailers - Payment or Cash Accounting basis 9.2 Agents recording transactions in their own name 9.3 Invoicing for supplies made through a selling agent 0.1. Invoicing for supplies obtained through a buying agent 9.5 Auctioneers PART 10- INSURANCE 1. Insurance Premium levy: 10.1 Submission of returns by insurance businesses PART 11 1. Bad debt relief 11.1 Rules for claiming bad debt relief 11.2 How to claim the bad debt relief 11.3 Records to be kept for bad debt relief PART 12 12.0 Appeals and requests for review 12.1 ZRA internal review 12.2 The Tax Appeals Tribunal 12.3 Appealable matters 12.4 Appeal conditions PART 13 - Appendices PART 1 1.0 Explanation of Value Added Tax (VAT) This part explains the basic mechanisms and how VAT is levied, charged and collected. 1.1 The Mechanisms of VAT The VAT system is applicable to all businesses in the production chain that is from manufacture through to retail. VAT is also levied on imports. VAT is collected at each stage in the chain when value or an incremental figure (mark-up) is added to goods or services, hence the name “Value Added” Tax. Goods or services sold or rendered at values less than their purchase amounts will still attract VAT at the prices they are traded at, subject to certain excep- tions i.e the Open Market Value. It is thus not true that VAT will only apply to a transaction when a good or service fetches more than it cost the business in purchase amount. The essential mechanism of VAT is as follows: For VAT purposes the sale or disposal of goods, or the rendering of services is called supplies. When a business that is registered for VAT supplies goods or services, VAT is charged and collected by the business, the VAT on these supplies or sales is called output tax. When a business that is registered for VAT purchases goods or services, the VAT incurred on these supplies received or purchases is called input tax. At the end of each tax period, the VAT due is arrived at by deducting the total input tax on supplies received (purchases), from the total output tax on supplies made (sales). Where the output tax exceeds the input tax for the period, the difference must be paid to ZRA. If the input tax exceeds the output tax a VAT refund is due. VAT refunds will normally be made within thirty (30) days from the date of lodgment of the return. However, if a taxable supplier has outstanding tax liabilities, the refund may be offset against such liabilities. 1.2 VAT Computation The following example shows how VAT works through the chain from Manufacturer to retailer. A manufacturer makes copper trays which are sold through a wholesaler to a retail supermarket and then on to the consumer. The VAT rate is 16%: The Manufacturer sells the copper tray to the Wholesaler for K2, 900.00 VAT inclusive, being K2, 500 for the item and K400.00 VAT. He uses his own labour both to mine the copper and make the tray so he makes no purchases. The tax position of the manufacturer is as follows: a) Manufacturer: Sales (supplies made) K2,500 Output VAT K400.00 Purchases (Supplies received) Nil Input VAT Nil Value Added K2, 500 VAT payable to the ZRA (output tax minus input tax) K400.00 Assuming the Wholesaler sells the copper tray to the supermarket for K4,640.00 VAT inclusive (K4,000.00 for the item and K640.00 VAT). The VAT on purchases was K400.00. The net VAT paid to ZRA by the wholesaler is (output tax minus input tax) K640.00 - K400.00=K240.00 b) Wholesaler: Sales (supplies made) K4,000 Output VAT K640.00 Purchases (Supplies received) K2,500 Input VAT K400.00 Value Added K1,500 K240.00 VAT payable to the ZRA (output tax minus input tax) K240.00 The retailer puts a mark-up of K1,000 and sells to the final consumer at a VAT inclusive price of K5,800. Since he suffered K640 VAT on his purchase, he only pays K160.00 to ZRA as illustrated below. c) Retailer: Sales (supplies made) K5,000 Output VAT K800.00 Purchases (Supplies received) K4,000 Input VAT K640.00 Value Added K1,000 K160.00 VAT payable to the ZRA (output tax minus input tax) K160.00 So ZRA finally collects the K800 on a VAT inclusive total sales value of K5,800 in 3 stages, i.e. K160.00 from the supermarket on a value added amount of K1,000; K240.00 from the wholesaler on a value added amount of K1, 500; and K400.00 from the uploads/Industriel/ vat-guidezra 1 .pdf