Today, we’ll delve into the intriguing topic of Value Added Tax (VAT) and its influence on business transactions, focusing specifically on the “no input VAT no output VAT” rule. This rule dictates that no output VAT should be applied to a sale if the corresponding input VAT was disallowed upon acquisition. Output VAT refers to the VAT charged when a VAT-registrant sells goods or services, while input VAT pertains to the VAT incurred during the acquisition of business inputs. This rule can significantly impact businesses, and it’s crucial to analyse its implications thoroughly. As we continue, we aim to provide clarity on this principle.
The basics
To start, we’ll provide a brief overview of VAT and its operational mechanism. VAT, an indirect consumption tax, is charged on the supply of taxable goods and services, levied on transactions rather than directly on income or profit, and also applied to the importation of goods and services. VAT functions as a consumption tax on goods and services, applied at each stage of the supply chain where value is added, from initial production to the point of sale. The amount of VAT paid by the user is based on the product’s cost minus any previously taxed costs of materials or services incorporated into the product. Now, let’s delve into the specifics of the no input VAT no output VAT rule as prescribed by the VAT Act.
The law
The VAT Act states that, verbatim, “Where a registered person supplies goods or services and a deduction for input tax paid on the acquisition of such goods or services was denied, the supply by the registered person is a supply of goods or services otherwise than in the course or furtherance of a taxable activity.” In simpler terms, the VAT Act dictates that if input VAT on a purchase has been disallowed, then no output VAT should be charged on a subsequent sale of the same goods or services.
Now, let’s consider an example to clarify the rule. Suppose XYZ purchased goods for P100,000 (excluding VAT of P14,000) from another company, ABC, and XYZ sells those same goods for P150,000 (before VAT) to DEF. If XYZ was denied any input VAT by the VAT Act on the original purchase, then XYZ cannot charge output VAT on the sale to DEF. This implies that XYZ would have absorbed the input VAT it suffered when purchasing the goods from ABC. Essentially, the VAT becomes a cost to XYZ, making XYZ the final consumer for VAT purposes.
Conclusion
In summary, the ‘no input VAT, no output VAT’ rule is a complex concept with both benefits and challenges for businesses and taxpayers. It’s crucial to grasp how the rule operates and to ensure that taxpayers maintain compliance with the VAT laws.
Well, folks, we hope that was insightful. As we, the two, Yours Trulies say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or learn about our 9 Tax e-books. Send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
