Value Added tax [VAT]
---------------------------------------------
SN
Meaning and Features of Value-Added Tax
What is VAT ?
An Indirect Tax levied upon transaction of
goods and services.
Value Added Tax (VAT) is a consumer tax. It is
collected by VAT registered businesses on
their supplies of taxable goods and services.
Because VAT belongs to the family of sales
tax, at first glance the tax appears to be
imposed on business entities while actually
the ultimate burden of the tax is borne by
consumers
Principles on scope of application
• Origin principle [ focus on place of production]
• destination principle[ focus on place of
consumption]
Ethiopian VAT regime
Power to levy VAT
proclamation 285/2002
regulation 79/2002
amend pro. 609/2009
proc. 1157/2019
directives
features of Ethiopian VAT
Destination principle
Credit method [VAT liability calculated through CM]
Taxpayers for VAT , Art 3 cum 7(4)
1) A person who is register for VAT or a person
who is required to be registered)
2) A person who imports taxable goods to
Ethiopia and
3) non-resident persons who import services
to Ethiopia without registering for VAT.
• A person who is registered is a taxpayer from
the time the registration takes effect.
• A person who is not registered, but who is
required to be registered, is a taxpayer from
the beginning of the accounting period
following the period in which the obligation to
apply for registration arose. Ex. If arose in
April, from the beginning of MAY.
Req. for registration, Art 16.
1. supplies taxable transactions by engaging in
taxable activities;
2. the annual turnover of the supplier should
meet the threshold provided in the law.
Directive 25/2001
In addition to those persons provided in article 16 of the proclamation
directive 25/2001 has provided list of persons who are obliged to register for
VAT, these persons include:
Traders engaged in sale of gold
Engaged in electronics business sale of refrigerator, TV and the like
Importers
Engaged in plastic business
Shoe factories
Contractors from level 1-9
Traders engaged in sale of computers and computer accessories
Traders engaged in sale and preparation of leather products
a person who carries out the abovementioned business activities is
required to register for VAT irrespective of the amount of annual turnover.
Imposition of Tax and Transactions
Art 7
VAT imposed at :
(A) Every taxable transaction by a registered
person;
(B) Every import of goods, other than an
exempt import; and
(C) an import of services.
A) taxable transaction??
• A taxable transaction is a supply of goods and
rendition of service in Ethiopia in the course of a
taxable activity other than exempt supply.
• Supply of goods or rendition of services means the
selling or leasing of goods or services by the supplier to
the consumers.
• Taxable activity is to mean taxable business activities
conducted in Ethiopia for consideration by any registered
person or non resident through PE or internet.
B) Every import of goods, other than an
exempt import; Art 7
The second taxable items are import of
goods. Every import of good is subject to the
payment of VAT unless the imports are
specifically exempted by the proclamation.
iii) An import of services, Art 3 cum Art 23
• an import of service is identified as a transaction rendered
by nonresident and non registered person for VAT to a
person in Ethiopia.
• In addition, for these types of services to be subject to tax
in Ethiopia the recipient of the service must be a person
registered for VAT or a resident legal person.
• In this situation when a non-resident person renders
services in Ethiopia the resident person, the recipient of the
service, is required to withhold the VAT from the payment
that he is going to make to the provider of the service.
Rate applicable
• The first one is a flat rate of 15% while the second
one is zero-rating. Hence, in Ethiopia, as a matter of
rule all taxable supplies, except the zero-rated
ones, are taxed at a flat rate of 15%.
• In other words, it makes no difference whether the
supply is a domestic supply of goods or services or
whether the supply involves import of goods or
services. In whole, the 15% flat /proportional/ rate
is the rule and the zero-rate (0%) is an exception to
the rule.
zero-rated?
• As the name indicates no tax is actually collected
since the rate is zero. This means that although
those persons supplying zero-rated transactions
are within the ambit of VAT, they collect no VAT
from consumers. If that is the case, therefore, what
is the importance of talking about zero-rated
transaction? Why does the law deal with such
transactions without imposing any actual tax
liability on the consumers? How is a zero-rated
transaction different from exempt-transaction?
• Mr. X, Purchase WHEAT from the wheat distributers
at a price of 100 birr
• but MR X paid a tax of 15 birr while buying the
wheat= 115 Value. But while calculating Value of
supply we do not add the input value added tax paid
in the previous transactions.
• And Mr. X Selling price of the same good 150 birr
• Which means Mr. X sold at The profit is 50 birr = in other
words, 50 birr is the value added.
• hence, the value of supply on which the VAT rate imposed is
150 birr. Value of supply is the amount the seller charge the
consumer. From this amount the Rate will be imposed.
• 150*15% = 22.5. which is called out put tax.
• the consumer will pay 172.5 birr. 150+22.5= 172.5
• From the out put tax that the seller collected from the
consumer, the input tax paid by the seller will be deducted or
credited. How much the seller paid as input tax? 15 birr.
Thus, 22.5 – 15 birr= 7.5 birr. Will be the actual VAT declared
to the government.
• If we see the illustration , it is the consumer who paid the
previous input taxes and the actual tax to be paid to the
government. Which means that since the consumer paid
22.5 birr, we can say that the input tax amount of 15 birr and
the final tax paid to the government of 7.5 birr is covered by
the consumer. 22.5= 15 +7.5 .
• Students, anyway, the actual tax paid to the government is
levied on the valued added. i.e. on 50 birr. The seller first
bought at 100 birr and sold at 150 birr.
• Hence, the value added is 50 birr. 50 x15%= 7.5 birr which is
actually paid to the tax authority. Tax is imposed on the
value is to mean, the real amount of tax to be given to the
government is on the profit/valued added only.
Zero rate Vs. exemption
• To the extent that no VAT is collected in relation to zero-rate
transactions, zero rated transactions are similar to exempt
transactions as both of them generate no VAT revenue to the
government.
• However, zero-rating operates within the VAT system while exempt
transactions are out of the reach of the VAT system. Those
taxpayers who are engaged in supply of zero-rated transactions are
entitled to tax crediting for the VAT they pay while purchasing their
inputs.
• However, persons engaged in supply of exempt transactions are not
entitled to tax crediting. Most of the time, supplies are zero-rated to
encourage exporters so as to enable them to compete in
international trade.
what transactions are Zero rate? 7(2)
• Art. 7(2) of the proclamation and Arts. 34-38
of the Regulations is important.
Example: -
– the export of goods or services
– The supply of gold to the National Bank of
Ethiopia.
Calculation of VAT Payable and Tax
Crediting under the Ethiopian VAT
• Input tax
• out put tax
• Actual VAT
-----------------------------------------------------------
Creditable
• Art. 21(1) of the Proclamation states that the amount of
VAT that is creditable is the amount of VAT payable (paid)
by a registered person in respect of:
– VAT paid while importing of goods that take place during the
current accounting period.
– VAT paid for taxable transactions involving the supply of
goods. VAT paid in the purchase of intermediary goods and
services.
– where the goods or services are used to or to be used for
the purpose of the registered person’s taxable transactions.
Requirements for tax crediting
• i) Must be registered
• ii) The claim must be supported by invoices
• iii) The purchase for which input VAT paid
must be used for the taxable transaction.
VAT= out put tax – credits
Treatment of excess credit
carry forward as a credit for future accounting periods
Refund
the amount of VAT applied as a credit in excess of the
amount of VAT charged for the accounting period is to
be carried forward to the next five accounting periods
end credited against payments for these periods.
and any unused excess remaining after the end of this
five-month period shall be refunded by the Authority
within a period of two months
