Law of VAT and TOT Lecture Notes in ppts

1. Value Added Tax
By: Alemu Taye (Asst. Prof.)
Debre Markos University
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2. VAT Transaction
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FARMER
MANUFACTURER
CONSUMER
WHOLESALER
RETAILER
100 kg cotton*1=100 birr It retain 100 birr, give receipt
100*15/100=15 birr for mfr and forward 15 birr
Total price=115 to the gov’t
2 Pellow *55= 110 birr it retain 110 birr, give receipt
110*15/100=16.50 birr VAT for Wslr and forward 1.50
Total price=126.50 birr to the gov’t
2 Pellow *60= 120 birr it retain 120 birr, give receipt
120*15/100=18 birr VAT for RTR and forward 1.50
Total price=138 birr to the gov’t
2 Pellow *65= 130 birr it retain 130 birr, give receipt
130*15/100=19.50 birr VAT for CSR and forward 1.50
Total price=149.50 birr to the gov’t
Its pays 19.50 birr VAT and remove the receipt

3. ToT Transaction
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FARMER
MANUFACTURER
CONSUMER
WHOLESALER
RETAILER
100 kg cotton*1=100 birr It retain 100 birr, give receipt
100*2/100=2birr ToT for mfr and forward 2 birr
Total price=102 to the gov’t
2 Pellow = 112 birr it retain 110 birr, give receipt
112*2/100=2.24 birr ToT for Wslr and forward 2.24
Total price= 114.24 birr to the gov’t
Pellow = 124.24 birr it retain 124.24 birr, give
124.24*2/100=2.4848 ToT receipt for RTR and forward
Total price=126.7248 2.4848 birr to the gov’t
2 Pellow =136.7248 birr it retain 130 birr, give
136.7248 *2/100= 2.734496 ToT receipt for CSR and forward
Total price=149.50 2.734496 birr to the gov’t
The consumer pays 139.459296 and remove the receipt
The government collect 9.459296 ToT

4.  These diagrammatic expressions have a lot to say about the
conventional VAT and ToT system.
 What are the major points worthy of attention
 Yet, there can be variations across countries
 Comparison with other forms of single stage (Customs Duty) and
multiple stage (excise tax, ToT) sales taxes???
 narrow tax base
 Cascading
 Commercial fairness and complementary role of ToT
 Regional power as VAT is a federal tax
 There are only 2%, 10% as ToT rates
 There are exemptions like VAT
 Declared within 3 months # per month
 See ToTP No. 308/2002
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5.  It belongs to the family of sales/ transaction tax but has its own unique features.
 Its an alternative technique of collecting sales tax.
◦ Impact (business entities) --- incident (final consumers)
◦ The medium of business entities
◦ ---in proportion to the value added (expressed in the form of additional prices
at each stage)
◦ Multi-stage character/ every time it changes hands in the chain of production
and distribution
◦ Crediting/ rebating mechanism (output tax- input tax)
 How VAT conquered the world
◦ 1920--1954– 1970—2002
◦ The Mata Hari of the world (only USA and few countries are left)
◦ Ethiopia (though late) accept the gospel of VAT as 35th African country, in
spite of the possible constitutional hurdles.
 Constitutional debate
 HoF and HPR decision
 Regional discontent and directive no. 22/2009
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6.  Fiscal crisis in the different parts of the world
 Political factors- the influence of the powerful economic bloc i.e. EU, IMF, WB,
WTO etc.
 The advantage outweighs the disadvantage
 Advantages of VAT
 Low evasion
 Anti-cascading effect
 Encourages saving and investment
 Encourages exports- destination principle # origin principle
 Attractive revenue potential
 Disadvantages of VAT
 Regressivity- effect on lower income groups
 Complicated
 Demand improved administration, keeping proper accounts, high
cooperation of the taxpayers
 Uneconomical especially for the smaller firms
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7.  Based on the scope of inputs crediting there are three types of VAT (Rebating -(IVAT
– OVAT)- is common)
◦ Gross product VAT: Input taxes on purchase of capital goods such as machinery,
building and depreciation are not allowed to be rebated
◦ Income type VAT: Input taxes on purchase of capital goods are refundable but
periodic allowance for depreciation can be taken.
◦ Consumption type VAT: All business purchases including capital equipment and
depreciation are allowed of rebate
 3 Methods of Computing VAT Liability
◦ Credit/ invoice method: output VAT – input VAT (predominantly used)
(monthly)
◦ Subtraction method: (total sales- the amount of purchases) * the VAT rate
(annual)
◦ Addition method: payments made by the firm to the factors of production * the
VAT rate (annual)
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8.  Two principles of imposing VAT
◦ Destination Principle: VAT is imposed on goods or services on the basis of
their destination of consumption. Imports subject to VAT and exports are
zero-rated. most dominant, and consistent with WTO rules of international
trade.
◦ Origin Principle: imposes VAT on the basis of the origin of the good, rather
than its destination. Goods imposed where they are produced. Imports not
subject to tax and exports are subject to tax.
 Summary: Features of VAT in Ethiopia
◦ Consumption type: Art. 21(1)
◦ Credit method: Art. 20
◦ Destination principle: Art. 7(3)
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9.  Taxpayers are agents of the authority that cannot reach every
consumer (# the ultimate bearers of tax burden- final consumers)
 Art. 7(1), taxpayers are suppliers of g/s, importers of s, non-
resident persons who import services (Art. 23)
◦ Registration
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10.  Transactions (such as supply/ rendition/ import) are mandatory
requirement
◦ But what constitute A supply of G or rendition of S or import of
G for tax purpose?
◦ See the basic elements under Art. 4 and 5 of VATP & Art. 3 of
VATR
 A supply of G or rendition of S or import of G (the normal case)
 A supply of G or rendition of S or import of G Incidental or as
part of the main contract (e.g. Installation, maintenance)
 Consumption by the taxpayer or related persons/ diversion
 Mixed transaction and its exception for partly exempted and
partly taxable supply/ rendition /import (separate transaction) Art.
8(2) (p) of VATP & Art. 33 (2) of VATR
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11.  Every supply of g & s isn’t subject to VAT.
 Laws defined it in a border way by providing considerations such
as minimum threshold, economic other “non-business” activity
(for consideration), non-exempted, undertaken by taxable person,
continuity and frequency of activity etc.
 Art. 6 of VATP as amended (Art. 2(3)) Cum Art. 4 of VATR
◦ Taxable activity = an activity which is carried on by a registered
person whether or not carried on continuously or regularly and not
exempt transactions.
 The exception is activity by non-registered persons under Art. 23 of
VATP- reverse taxation.
◦ Though the stipulation Ethiopia in seems narrow, we can’t ignore the
above requirements in other countries. E.g. it should be a business
activity, for consideration, elements of continuity or regularity etc. b/c
registration couldn’t happen without these elements.
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12.  With a view to treat consumers at different level differently, mitigating
the regressive nature or incidence of VAT, national laws introduced level
of VAT rates- differential rates.
 But to avoid administrative complexities only a few level of rates are
recognized
 Art. 7 of VATP adopted two levels of rates (whether its domestic supply
or it involves import)
◦ The standard rate (15%)- for transactions other than zero-rated transaction
◦ The Exception rate (0%) zero-rating or zero-rated transaction Art. 7(2) of
VATP Cum Arts. 34-38 of VATR specify transactions
 No tax is collected, like in the case of exempt transactions, but zero-rating
operates within the VAT system (can claim crediting of input VAT)
 It’s a means of encouraging some activities. export, service rendition in
international transportation service, supply of gold to NBE, a supply by a
registered person to another registered person as a going concern- during
bodies reorganization
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13.  Exemptions in VAT vary in the goals or objectives they seek to achieve.
 Some supplies are exempted b/c they are difficult to tax. Ie
administrative complexity, absence of value addition
 Eg. Example: exemption of dwellings and financial services.
 Some supplies are an expression of social and economic policy i.e.
transactions that are necessary, would worsen regressivity
 Eg. There are numerous exemptions in this category: education,
health and medical supplies, humanitarian services, religious
services or specific goods like milk, bread, injera, etc.
 Exemptions for Investment Instruments
 Eg. supplies of shares, bonds, securities, etc are exempted because
they are not really consumption goods.
 Supplier are totally out of the ambit of the VAT system no right and obligation
 Consumers consume the goods or services without paying
 The scope of exemption has been controversial in many VAT systems, including
Ethiopia- Art. 8 of VATP Cum. Arts. 19-33 of VATR
 The list not exhaustive but the requirement
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14.  Knowing the place, time and value of supplies is crucial to
determine the amount of VAT collected.
 This is because value of supply differs from place to place on
account of transportation and other costs.
 the law stipulates guiding principles of determining them
◦ Place of Supply Arts. 9 and 10
◦ Time of Supply must report taxable supplies and claims tax credits,
issuance of VAT invoice Art. 11 of the Proclamation and Art 6 of the
Regulations in advance payments, failure to issue invoice,
installments payments,
◦ Value of Supply The value of taxable supply generally is the amount
of money and the fair market value of the consideration received.
 Art. 12, 13, 15 of the proclamation and Art. 7 of the regulation
 the amount a person receives or is entitled to receive
 adjustment of value the transaction is cancelled or changed
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15.  In VAT taxpayers (taxable person) are those who are registered (a
registrant) or are required to register usually based on a threshold amount
of taxable supplies.
 In Ethiopia, registration is regulated by Art. 3, Art. 16, Art. 17 and Art.
18 of the Proclamation and Arts. 8 and 9 of the Regulations.
◦ Registration is a requirement to be a taxpayer, but registered persons are not
the only persons who/which collect VAT (e.g. persons who import goods or
services are taxpayer without registration Art. 3 (2, 3) and Art. 23 of VATP)
◦ Suppliers of taxable transactions/ activities with annual historical or future
turnover of exceeded 500,000.00 Birr are required to register for VAT.
compulsory registration
◦ Voluntary registration (a person supplying 75% of his taxable transactions,
but who/which does not satisfy the threshold can voluntarily apply for
registration)
◦ Registration by nature of trade (directive)
◦ There can be deregistration (cancellation of registration) for different
reasons such as by application when the taxpayer ceased to make taxable
transactions or the annual turnover is below the threshold. 15

16.  In computing the VAT payable output taxes, input taxes and tax
credit shall be determined
 Art. 21 of the VAT proclamation and Art. 11 of the Regulation
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17.  Administration?