Value Added Tax (VAT) is a consumption tax that is levied on the supply of goods and services. It is collected at all stages of supply of goods and services, i.e. at manufacturing/importer stage, and distribution stage and at retail stage. To avoid double taxation, intermediary players such as manufactures, distributors and retailers are allowed to deduct the the VAT that they incur on their purchases and expenses. Only the final consumer incurs the VAT.
Below is a visual illustration of the VAT collection mechanism.
Assuming the first entity, the supplier of raw materials does not incur any VAT its operations, VAT at the rate of 16% is collected as follows:
- The supplier harvests the raw materials and creates value of 150 and supplies the materials to the manufacturer. The raw material supplier’s liability is 24, which is the difference between 0 VAT on inputs and 24 VAT on sales.
- The manufacturer buys the raw materials at the value of 150 and incurs VAT of 24 on the input. The manufacturer adds value of 100, sales the finished good to the retailer at 250 and charges VAT of 40. The manufacturer expenses the whole amount of VAT on inputs, 24, and pays the difference of 16 to the tax administration.
- The retailer buys the finished product from the manufacturer and brings it to the shopping mall, adding value of 50. The retailer sales the finished product at a value of 300 to a consumer and charges VAT of 48, expenses the VAT on inputs and pay the difference of 8 to the tax administration.
- The consumer, buys the final product at 300 and pays VAT of 48 to the retailer. This amount is equal to the total amount that tax administration ultimately collects on the product.
VAT was introduced in Zambia on 1st July 1995, replacing sales tax. It is preferred by many countries becausese of:
- Revenue adequacy
- Neutrality on consumer and produces choices (economic efficiency)
- Ability to free exports from tax, thus making them more competitive on the global market and its revenue buoyancy- revenues grow with the growth of the economy.
- Fairness in that all goods and services can be taxed alike
- Its administration costs are relatively lower that other consumption taxes
- Its political robustness.
Zambia has implemented the European type of VAT, which seeks progressivity by identifying certain merit goods, goods and services that are predominantly consumed by the low-income groups, and exempting them from VAT. Though implementing VAT in this manner seems to be politically favored, research has demonstrated that in most cases it does not benefit the intended groups. Instead the high-income groups benefit more than the low-income groups. Researchers have proposed a VAT system that:
- Does not have exemptions except where practicality challenges exist.
- Has one standard rate
- Has a reasonably high statutory registration threshold and a reasonably low voluntary registration threshold.
Proponents of the New Zealand VAT system argue that for a broad tax with a high revenue potential like VAT it is more rational to seek progressivity in the design of the whole tax system, including the government expenditure side, than in the single tax.
All taxpayers that make supplies of goods and services whose annual turnover from the sale of taxable goods and services is K800,000 are required to regsister for VAT. Other persons that may be required to register for VAT are Reverse VAT agents and WVAT agents. Reverse VAT agents are required to maintaining two accounts, one for accounting for their agencies fees and the other for accounting for the VAT of their principle supplies. Witholding VAT Agents only have to register for VAT withholding accounts.
The standard accounting period for VAT is a calender month, but provides for non-standard accounting periods to suit taxpayers with special needs. The due date for filing returns and making payments is the 14th day of the month following an accounting period.
Exemption and zero-rating are two methods that are use to grant taxpayers relief. The choice between the two methods depends on which party the policy is targeting. If the supply of a good or a service is exempt, it means that no VAT is charged in its supply, and the supplier of that good or service must not claim any VAT that is incurred in the course of making the supply. If it is zero-rated it means that the the supply will not attract VAT but the supplier may claim any VAT that is incurred in course of making it.
Exemption increases the cost of making a supply becausese the VAT that is incurred in the process of making the supply is not recoverable. It is cascaded in all stages of production of the goods or services and the consumption price is inclusive of the tax. Zero rating on the other hand allows the intermediary parties in the supply chain to claim the VAT that is incurred in the process of making the supply and therefore, the consumption price is VAT free.
In Zambia policy makers prefer the exemption relief becausese it means less tax expenditutre on the part of government and politically, it faces little resistance becausese the tax element in the consumption price is not visible.