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Revealed: A basic rundown of how the Vat system works

by , 22 January 2014
Even seasoned Vat professionals sometimes get lost in the Vat maze. Here's a simple, easy-to-follow overview of how the system works.

Did you know that we didn't always have Value-Added Tax, more commonly known by its acronym, Vat in South Africa?

That's right, 'before its implementation in 1991; we paid a retail tax called general sales tax (GST),' says the Practical Vat Loose Leaf Service.

When policymakers introduced Vat, they built the following core principles into the system:

  • Vat would be an invoice-based type of tax levied on the value added to goods or services at each step of the supply chain.
  • The Vat base would be made as wide as possible to keep the rate as low as possible. And exemptions would be kept to a minimum.
  • Vat would be levied at a single rate.

These basic concepts still form the basis of the Vat system we have in place today.

Let's take a look at an overview of the Vat system.

The Vat system works as follows:

Vat is an indirect tax and must be included in the selling price of every taxable supply of goods or services.

The tax that you add to the selling price of your goods forms the output tax for those goods; whereas the tax you pay on goods you buy forms the input tax.

It's this input tax that you can claim back from SARS. And, if you're tax-smart, you'll use your input tax credits to claim back every cent you can from the taxman and optimise your cashflow.

There are two types of supplies a VAT vendor makes:

  1. Taxable supplies; and
  2. Exempt supplies.

Let's take a look at each one of these supplies.

A taxable supply includes any supply of goods or services that you make in the furtherance of your enterprise, business or service. A taxable supply will have Vat charged at either:

Exempt supplies: Vat isn't levied on the supply of exempt goods. They're completely separate and different from taxable supplies and so they won't form part of your taxable turnover for Vat purposes.

Well there you have it. That's your basic rundown the Vat system. Find out more here about the next phase which is Vat registration.

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