One of the most common buzz words in South Africa right now is the VAT increase. Individuals and corporates are wondering what effect this will have on the bottom line and if they will be able to cope with the consequence. We discuss the basic history of VAT and implications of this increase and how the VAT system works.
The origins of VAT date back to 1919 in Germany. France later introduced production tax; a form of VAT which was replaced with the producer’s income-based tax in 1948 and consumption tax in 1954.
The Statement of Standard Accounting Practice (SSAP, 1993) defines VAT as “a tax on the supply of goods and services which is eventually borne by the final consumer but collected at each stage of the production and distribution chain.”
VAT is charged on the supply of all goods and services made in the course of a business by a taxable person unless they are specifically exempt. VAT is levied at each stage of the supply chain, from the manufacturer to the wholesaler, to the retailer, taxing the value added by businesses at each point in the chain. For instance, raw wheat becomes more valuable as it moves along the supply chain to eventually be manufactured into bread or whatever the end product may be. This reinforces the principle that VAT is a tax borne by the end user in the economy, which are households. The increase in VAT from 14% to 15% increases inflation, as every supplier in the value chain adds 1% to their price, and thus the end user bears the brunt of that multiplied price increase.
Businesses are required to register for VAT if their turnover of taxable goods &/or services is above a given threshold, which is currently R1million. A registered business will pay input tax; which is VAT on its purchases and in turn, charges Output tax; which is VAT on its sales. VAT is not a business expense for a registered vendor, but a cost that is ultimately passed on to the end-consumer when they buy the final product. Vendors thus act as collection agents, collecting the tax on behalf of the government.