CHAPTER 13: VALUE ADDED TAX (VAT)

 Administered through the Value Added Tax Act [Chapter 23:12]

13.0 INTERPRETATION OF LAW

 In any study of tax law it is important for one to take note of:

(i)Intention of the legislature

 When there is ambiguity in law, the legislative intent of the legislature

in enacting legislation may sometimes be considered by the judiciary
when interpreting the law.

(ii)Contra Fiscum Rule

 The contra fiscum rule is a common law principle stipulating that
should a taxing statutory provision reveal an ambiguity, the ambiguous
provision must be interpreted in a manner that favours a taxpayer
(Badenhorst v CIR 1955 (2) SA 207 (N) 215).

13.1 What is VAT?

 Value Added Tax (VAT) is an indirect tax levied on the supply of goods
or services.

 It is also levied on the importation of goods and, under some

circumstances, on the importation of services.

 It is charged on the value added at each stage in the chain of

production.

 It is levied and accounted for at the prescribed rates and is borne by

the final consumers of goods and services.

 For some goods and services a special rate of 0% is applied, while a

limited range of goods and services are exempted from the tax.

 Because the tax is borne by the final consumer, it can be called a

consumption tax as the amount of tax one pays is directly related to
the purchases made.

 It is collected at each stage of production, distribution and importation.

13.2 Definition of terms (section 2)

13.2.1 Connected Persons

  The term is important because if two persons are connected the CG
may require that VAT be charged on the Open Market Value (OMV)
rather than on the amount of consideration received.

 Examples of connected persons: -

 A company and its Directors.

 Parents and their children.

 A Trust and a beneficiary of that Trust.

 Separately registered branches of a registered operator.

13.2.2 Consideration

 Refers to that which is given to the supplier as payment for the supply
and includes tax.

 Normally the consideration is in money but it also includes barter

transactions where other goods are given or services rendered to the
supplier as payment.

 Includes any act or forbearance whether voluntary or not for the

inducement of a supply of goods or services.

 It does not include any donation made as an unconditional gift to an

association not for gain.

 Also excluded is a “deposit” which is lodged to secure a future supply

of goods or services.

 However, a “deposit” paid on a returnable container constitutes

consideration.

13.2.3 Entertainment

 Means the provision of any food, beverages, accommodation,

entertainment, amusement, recreation or hospitality of any kind by a
registered operator whether directly or indirectly to anyone in
connection with a trade carried on by him.

13.2.3 Fixed Property

 Means land, together with improvements affixed thereto.

 Any share in a company, which confers a right to, or an interest in the

use of immovable property.

 It does not include farmland.

13.2.4 Imported Service

 Means a supply of services that is made by a supplier who is resident

or carries on business outside Zimbabwe to a recipient who is a
resident of Zimbabwe to the extent that such services are utilized or
consumed in Zimbabwe for purposes of making non-taxable supplies.

13.2.5 Input Tax

 This is the tax paid by the recipient of the supply of any goods or
services to the supplier.

13.2.6 Instalment Credit Agreement.

 Hire Purchase agreements.

 Finance lease.

 This type of agreement must be distinguished from a rental agreement

where the recipient does not become the owner of the goods at any
stage.

13.2.7 Open Market Value

 Is the consideration in money which the supply of goods or services

would generally fetch if supplied in similar circumstances at that
date in Zimbabwe.

 In a supply between persons who are not connected.

13.2.8 Output Tax

 The tax charged under section 6(1)(a) in respect of supply of goods

and services by the registered operator.

13.2.9 Registered Operator

 A person who is registered or is required to be registered for VAT.

13.2.10 Second –Hand Goods

 These are goods, which have been previously owned and used.

 Excludes animals and certain gold coins.

13.2.11 Services

 Services means anything done or to be done.

13.2.12 Taxable Supply

 A supply (including a zero rated supply), which is chargeable with tax
under the VAT Act.

13.2.12 Trade

 Trade is a business in the broadest sense.

 It includes any activity carried on: -

 Continuously or regularly.

 By any person.

 In or partly in Zimbabwe
 In the course of which goods or services are supplied to any other
person for a consideration, i.e. some form of payment.

 Whether or not for profit.

 It therefore includes:

 Business transactions to start or close down business.

 Ordinary businesses such as: manufacturers, traders, auctioneers,

lessors, construction, etc.

 Trades and professions – builders, electricians, plumbers, doctors,

lawyers, accountants, etc.

 Non-profit organizations- sporting/ social clubs, charitable

organizations

 It also includes services by : -

 Public authorities – government departments, provincial authorities.

 Local authorities

 Charitable organizations

 It excludes:-

 Services rendered by an employee (who earns remuneration) to his

employer or by the holder of any office in performing the duties of
office, e.g. salary/wage earners or a company director (excluding an
independent contractor).

 The supply of goods or services by a concern from a branch or main

business which is permanently located at premises outside Zimbabwe
 if the branch or main business can be separately identified and
maintains its own system of accounting.

 Private or recreational pursuits or hobbies (unless structured like a

business)

 Private occasional transactions, e.g. occasional sale of

domestic/household goods, personal effects or private motor vehicle.

 Any activities to the extent that they are of exempt supplies.

 The definition of trade is one of the most important definitions in the

VAT Act and every person who is required to register or who applies for
voluntary registration must meet the criteria in the definition.

13.3 General Operational Aspects of VAT - Section 6

 Value Added Tax is levied under the Value Added Tax Act (Chapter
23:12).

 The tax is levied at prescribed rates on the following: -

 The supply of any goods and/or services in Zimbabwe by a registered

operator in the furtherance of an enterprise (trade).

 Goods imported into Zimbabwe.

 Services imported into Zimbabwe in certain circumstances.

13.4 Persons liable to pay VAT (section 6(2))

 In terms of section 6(2) of the VAT Act the following are liable to pay
the VAT:

 Registered operators(R/O).

 An importer of goods.

 Recipient of imported services.

13.5 Supplies

13.5.1 Zero Rated Supplies (section 10)

 Zero rated supplies are taxable supplies made by a registered

operator, which are taxed at the rate of 0%.

 There is no output tax actually collected in respect of the supply.

 Since a zero-rated supply is a taxable supply, registered operators

making zero rated supplies may claim full input tax in respect of goods
or services acquired to make the zero rated supplies.
  Traders who supply exclusively zero rated supplies are required to
register for VAT in terms of section 23 provided their aggregate annual
turnover is $60,000 and above or is likely to be $60, 000 and above.

 Zero rating applies primarily to exports and to certain other types of

transactions mainly for social and economic reasons.

Section 10 (1) – Zero-rated Goods

 Goods exported to an address in an export country.

 Goods (including consumables) supplied to repair goods temporarily

admitted into Zimbabwe.

 Goods supplied under a rental agreement if used exclusively in an

export country.
 Supply of business as a going concern.

 Gold supplied to the Reserve Bank or any other registered banks.

 Regular agricultural inputs supplied to farmers e.g. herbicides, fodder

and insecticide.

 Goods for disabled persons.

 Goods supplied to an independent branch in an export country.

 Supply of gold coins issued by the Reserve Bank

 Drugs as defined in the Medicines & Allied Substances control Act.

 Building bricks.

 Basic commodities, such as plain bread, plain buns, milk, cooking oil
etc.

 With effect from 1st January 2015, local sales of rough diamonds are
zero rated to encourage beneficiation/ value addition.

Section 10 (2): Zero-rated Services

 Transportation of PASSENGERS or GOODS to, from and outside

Zimbabwe.

 Transportation of PASSENGERS from one place to another place in

Zimbabwe by aircraft to the extent that the travel constitutes
“international carriage”.
  Transport and ancillary transport services supplied within Zimbabwe in
respect of imports and exports of GOODS, if supplied by the same
supplier responsible for the international transport of those goods.

 Services rendered in connection with land or improvements OUTSIDE

Zimbabwe

 Services rendered in connection with the repair of a train operated by

non-residents, not carrying on business in Zimbabwe.

 Services rendered whilst physically outside Zimbabwe (other than

telecommunication services utilized in Zimbabwe.

 Services supplied to a non-resident who is outside Zimbabwe at the

time the services are rendered, except where related to land and
improvements thereto, or movable property situated inside Zimbabwe.
(There are some exceptions to this rule).

 Patents and other intellectual property for use outside Zimbabwe.

 Deemed Services in terms of section 7 (5) supplied by a charitable

organisation to a public or local authority.

 The supply of services by a registered operator to his branch situated

in an export country.

Ancillary transport services

 The supply of transport services or ancillary transport service directly

in connection with the export of goods outside Zimbabwe or the import
of goods into Zimbabwe to a non-resident of Zimbabwe and who is not
a registered operator, is zero rated.

 Ancillary transport services means cargo inspection services,

preparation of customs documentation and storage of transported
goods or goods to be transported.

 A full list of zero rated goods are prescribed in terms of Section 10(1)
as read with the 2nd schedule to the VAT Regulation, while zero rated
services are prescribed in terms of Section 10(2) of the VAT Act.

Section 10 (3) – Documentation

 The above goods and services can only be zero rated if the registered
operator obtains and retains the necessary documentary proof
acceptable to the Commissioner, or as prescribed in the
circumstances.

13.5.2 Exempt supplies (section 11)

  Exempt supplies are those supplies on which no VAT is chargeable.

 A trader of exempt supplies is not required to register for VAT even if

he reaches the registration threshold.

 Cannot claim input tax.

Types of Exempt Supplies

 Supply of Financial Services(see section 2)

 Financial services are services supplied by a banking institution,

building society, insurance company, insurance broker, agent or
actuary, etc.

 The supply by an association not for gain of any donated goods or

services.

 Where the association manufactures goods, they are exempt if at least

80% of the value of the materials used consist of donated goods.

 The supply of residential accommodation in a dwelling under a lease or

hire agreement OR, where an employer permits his employee to
occupy the accommodation as a fringe benefit for the duration of the
employment.

 The supply of leasehold land used to erect dwellings and for existing
dwellings.

 Sale or letting of land outside Zimbabwe. Note that any SERVICES

relating to such land is zero-rated. S10 (2) (f).

 The supply of public road and railway transport to fare paying

passengers and their luggage. Note that the transport of passengers to
an export country is zero-rated and this will override the exemption.

 Any educational services for pre-school, primary, secondary, tertiary

and technical education and the education or training of physically/
mentally handicapped persons at any institution, which meets the
requirements of the Ministry responsible for education or higher
education.

 Medical services supplied by any person. This includes incidental and

subordinate services in respect thereof.
  The supply of goods and services by an employee organisation to any
of its members to the extent that the consideration for the supply
consists of membership contributions.

 The supply of piped water for domestic use.

 Rates charged by a local authority.

 Domestic electricity.

 Supply of fuel and fuel products.

13.5.3 Standard Rated Supplies

 These are supplies of goods and/or services that attract a VAT rate of
15%.

 Goods/services that are not specifically exempt or zero rated are

standard rated.

13.6 Deemed Supplies (Section 7)

 The Act has specified circumstances where an operator may be

required to declare a supply even though no actual sale of goods or
services has taken place.

 These are called deemed supplies.

 The following are some of these:

 Goods sold by an auctioneer to recover debts,

 Short-term insurance claims that have been paid in connection with

the enterprise (for example, insurance pay out received for damaged
or stolen stock (indemnity insurance).

 Repossession of goods sold under a credit agreement,

 Subsidies or grants from a local or public authority used in making

taxable supplies,

 A disposal of a business due to death, liquidation or sequestration of an

operator,

 Disposal of a business as a going concern.

  Transfer of goods or services by a registered operator to a branch
situated outside Zimbabwe, this applies to a branch which maintains
an independent accounting system.

 Where goods, originally sold under a hire purchase or credit instalment

are repossessed, such repossession is deemed to be a supply made by
a debtor to the person who is exercising his right of repossession.

 Betting – where a person bet an amount on an outcome of a race or

any other event, a supply of a service is deemed to be made by a
person with whom a bet is placed.

13.7 Value of supply (Section 9)

 The value of supply is a consideration in the form of money received,

excluding VAT.
 Supply not expressed in monetary terms, e.g. barter or donation is
valued at the open market value of an item received or given away.

 Where a supply is made for no consideration, the value of supply is nil.

 Where the supply is between connected parties and the goods or

services are supplied for a nil consideration, the value of supply is
determined as follows;

 If the recipient can claim input tax – the value of supply is the
consideration,

 If the recipient cannot claim input tax – the value of supply is the open
market value.

13.8 Time of supply (Section 8)

 The time of supply determines the tax period a transaction will fall in.

 The general rule of the time of supply is the earlier of the time an
invoice or the time any payment is received.

 The following are some exceptions:

13.8.1 Connected parties

 In the case of connected parties, goods are supplied when they are
made available to the customer and services are supplied when they
are performed.

13.8.2 Successive supply

  The tax point for a successive or continuous supply (e.g. audit
services), is the earlier of the receipt of a payment for the supply or
the issue of a tax invoice.

13.8.3 Coin operated machines

 For the recipient of the service, the time of supply is deemed to be the
time the coin is inserted in the machine and for the supply of a service,
the time supply is the time when the coins are removed from the
machine.

13.8.4 Construction contracts

 Where goods or services are supplied in the construction, repair,

improvement, erection, manufacture, assembly or alteration of goods
are supplied under any agreement or law which provides for the
consideration for that supply to become due and payable in
instalments or periodically in relation to the progressive nature of the
work those goods or services shall be deemed to be successively
supplied.

 The tax point for such supply is the earliest of receipt of any payment
for the stage reached or the issuing of a tax invoice.

13.8.5 Instalment credit

 Where goods are supplied under an instalment credit agreement, in

which the consideration for the supply is payable in instalments, the
tax point is the earliest of receipt or the issue of a tax invoice relating
to that payment.

13.8.5 Fixed property

 Where a fixed property or a real right in property is supplied under a

sale agreement, the tax point is the date of agreement, provided that
no consideration has been paid or the property has not yet been
transferred.

13.8.6 Other supplies

 The following rules apply:

 Betting – the time of supply is the time when payment is received by

the supplier for the supply.

 The supply by a debtor on subsequent repossession of goods

sold under instalment credit – the time of supply is deemed to be
the day on which the goods are repossessed.
  Supply under a lay-bye sale – time of supply is the date goods are
delivered, if the agreement is cancelled, time of supply is the date the
agreement is cancelled.

13.9 VAT on importation of goods (section 12)

 Value Added Tax is levied on imports unless they are exempt.

 The rate to be applied depends on the category in which the goods are
classified.

 For instance, standard rated goods are taxed at 15%.

 On importation of certain capital goods or equipment VAT may be

deferred for a minimum period of 90 days.
 The value to be attached on imported goods is determined by the
value attached to such goods for import duty purposes plus the duty
charged.

Example

On the 16th of May 2015, the company imported 100 machines from India
through Beitbridge and were put in the bonded warehouse. The value for
customs purposes was $8 000 each and the rate of duty was 40% and VAT
15% respectively.

Calculate value for duty purposes.

Show duty and VAT payable to Zimra for the year.

Solution

Value of 100 machines is 100*8 000 = $800 000

Duty = $800 000 *40% = $320 000

VAT 15%*320 000 = $48 000

13.10 Imported services (section 13)

 Means a supply of services that is made by a supplier who is a non-

resident of Zimbabwe or a resident of Zimbabwe who carries on
business outside Zimbabwe to a recipient who is a resident of
Zimbabwe to the extent that such services are utilised or consumed in
Zimbabwe for making exempt supplies.

 Time of supply is the earlier of payment or issue of invoice.

 Value of supply is the consideration of such supply or the open market

value whichever is greater.
EXAMPLE 1

Chinhoyi University of Technology was sued by its Lecturers that they had
fired following an illegal industrial action. The University hired Advocate
Khama from Botswana to represent it. He charged them 14 500 Pula for the
service. The open market value of the services rendered was 16 000 Pula. He
raised his invoice for the service on 1 August 2016 but payment was made
on 31 December 2016.

Required:

(a) Calculate VAT due if any.

(b) When is the VAT due?

(c) Who will account for the VAT?

Solution:

(a) VAT payable =15/115*16 000 Pula (greater of open market value or
consideration).

= 2 086.96 Pula

(b) The VAT was due on 1 August 2016, the general time of supply rule
applies, i.e. the earlier of an invoice being issued or any payment being
made.

(c) The university is required to account for the VAT.

13.11 Accounting Basis (section 14)

 VAT is accounted for on either the invoice basis or the cash basis.

13.11.1 Invoice Basis

 VAT is generally accounted for on the invoice basis.

 The invoice (or accrual) basis of accounting is that registered operators

account for both cash and credit sales and cash and credit purchases
in the month in which transactions are made.

 This means that VAT has to be accounted for when due irrespective of
whether payment has been made or received.

 The general time of supply rule is that registered operators will

account for VAT at the earlier of: -

 The time an invoice is issued, or

  The time any payment is received by the supplier.

Example:

Kumunda (Pvt) Ltd purchased a fridge for resale on 20 October 2016 and
received a tax invoice for $3 450 (incl. VAT @15%). It paid the supplier $2
300 on 31 October 2009 and the balance on 30 November 2016.

It then sold the fridge for $ 5750 (incl. VAT @ 15%) on 31 October 2016 and
issued a tax invoice for the whole amount the same day. It received 70%
deposit on the date of invoice. The balance was paid on 15 December 2009.

What is the VAT treatment of the transaction?

Solution
Kumusha (Pvt) Ltd is entitled to an input tax claim of (15/115 * $3 450) $450
and should account for output tax of (15/115 * $5750)= $750 in the tax
period ending 31 October 2016.

13.11.2 Payment/cash basis

 The registered operator only accounts for VAT on actual payments

made and received in respect of taxable supplies made during the
period.

 The payments/cash basis is currently available to local authorities,

public authorities and associations not for gain.

 Note: these will only use this basis upon being authorized by the
Commissioner to do so.

Example:

In the example above if Kumunda (Pvt) Ltd was authorized by the

Commissioner to be on cash basis will claim input tax of (15/115 X
$2300)=$300 and account for output tax of (15/115 X $4 025)=$525 in the
tax period ending 31 October 2016. However this will only be applied if
Kumunda (Pvt) Ltd is authorized by the Commissioner to use the payment
basis.

13.12 Calculation of VAT payable (Section 15)

 The tax payable shall, in terms of section 15(1), be in respect of each

tax period during which the registered operator has carried on a trade.

13.12.1 Documents required for claiming input tax (Section 15(2))

 Tax invoice,

 Debit note or credit note,

  Sufficient records in the case of second hand goods or repossessions,

 Bill of entry for imported goods.

13.12.2 Calculation of tax payable or refundable (Section 15(3))

 The amount of tax payable by the registered operator in respect of a

tax period shall be calculated by deducting from the total amount of
output tax any sum of input tax incurred during the tax period.

 This is often referred to as the mechanics of VAT. i.e.

Output Tax XX

Less

Input Tax (XX)

VAT Payable / Refundable (XX)

 Where a registered operator has previously been denied to claim input

tax as a result of not having a valid tax invoice and the Registered
Operator has obtained it during any tax period, he is entitled to claim
input tax during that period in which he has obtained it (Section
15(3) (f)).

 In the case of change of use from wholly or partly taxable to wholly

exempt, the operator is required to account for output tax on the open
market value of the goods in the tax period in which the change occurs
(Section 15(3) (g)).

Example:

An asset was used 75% for making taxable supplies. It was purchased for
$15, 000 and input tax was claimed accordingly. The asset was later used
100% for making exempt supplies. Its current open market value was
$17,000.

The operator will thus be required to account for output tax of $1,663.04
($17, 000 X 75% X15/115).

 Input tax can be claimed in any later tax period provided that it had
not been claimed before (Section 15(4)).

 Where the refund due to the registered operator is less than $60.00, it
will be credited to the account of the taxpayer rather than refunded
(Section 15(6)).
13.13 Deductions (Input tax)

 This refers to input tax claims on VAT charged by suppliers.

13.13.1 Permissible Deductions (Section 16(1))

 Input tax can be claimed if the purchases are for making taxable
supplies.

 Input tax can be apportioned where goods are acquired and used for
both taxable and non-taxable purposes.

 Input tax is then allowed to the extent to which the goods or services
are used for purposes of making taxable supplies.

 Where the intended use of goods or services in the course of making

taxable supplies is equal to 90% or more of the total intended use of
such goods or services, the goods or services shall be deemed to have
been acquired wholly for the purpose of making taxable supplies.

 This therefore means that full input tax is allowed.

 Where goods or services are successively supplied and the calculation

of input tax cannot be made accurately until the completion of the
supply of the goods and/or services, such input tax may be estimated
subject to an adjustment on completion of the supply.

 N/B: The apportionment in this case shall be based on turnover.

 Any other basis shall be subject to approval by the Commissioner.

13.13.2 Prohibited deductions (section 16(2))

 Input tax cannot be claimed under the following circumstances;

1. Goods and Services acquired for the purposes of entertainment

(Section 16(2)(a)).

 Input tax cannot be claimed on goods acquired for entertainment as

defined in Section 2.

Exclusions

 Entertainment supplied to a client where fees to cover direct or indirect

costs are charged.

 Promotional activities

 Left overs
  Entertainment supplied to employees where fees to cover costs are
charged.

 Entertainment supplied to a client where fees to cover direct or indirect

costs are charged.

 Promotional activities

 Left overs

 Entertainment supplied to employees where fees to cover costs are

charged.

 Meals supplied to a passenger during a journey.

 Refreshments provided at a seminar if cost is in-built in the seminar

charge.

 Goods acquired by a local authority for the provision of recreational

facilities through payment of a subsidy.

 Goods supplied to a private voluntary organisation in fulfilling its

object.

16(2) (b) Fees or subscriptions paid by the Registered Operator in respect

of membership of any club, association or society of a sporting or
recreational nature.

16(2)(c) Goods or services acquired by a Superannuation scheme for the

purposes of the supply by such scheme of any medical or dental services.

16(2) (d) Passenger motor vehicle supplied to or imported by the registered

operator.

13.14 Adjustments (Section 17)

13.14.1 Conversion of use (section 17(1))

 In this case goods would have been bought for the purpose of making
a taxable supply and are subsequently used for making non-taxable
supplies.

 The conversion of use is deemed to be a supply in the ordinary course

of trade and output tax should be accounted for, e.g. donation of goods
by a registered operator or in the case of manufacturers such as Delta
beverages, the monthly allocations of beverages to employees.

 However where input tax had been previously denied, the goods are
not deemed to have been supplied in the course of furtherance of a
 trade and as such the operator is not required to account for output
tax.

 The time of supply is deemed to be the time that the goods are applied
for non- taxable use or the change of use has been made in terms of
section 8(6).

 The value of supply shall be deemed to be the consideration in money

which is equal to the open market value of such supply.

Example

Mashava Mining (Pvt) Ltd imported 10 machines worth $8 000 each in March
2016. In June the company sold 8 of the machines to local mining companies
at a price of $14000 each, the remaining two machines were taken by two of
the directors of the company for their private use.
Show the VAT implication of the donation of the two machines to the
directors.

Solution

VAT output tax $ Sales (15/115/14 000 *8) 14 609

Adjustment: add VAT on change of use (15/115*14 000*2) 3 652

Less: Input tax Importation (15*8000*10) (12 000)

Tax payable 6 261

13.14.2 Granting of benefits by an employer who is registered for

VAT (Section 17(3))

 Any registered operator who grants a benefit or advantage to an

employee or office holder which is taxable in terms of section 8(1)(f) of
the Income Tax Act and such benefit or advantage consists of a supply
of goods or services, shall be deemed to have supplied goods or
services in the course of his trade and should therefore account for
output tax.

 This subsection shall not apply in respect of any supply of goods or

services which are exempt in terms of section 11.eg housing

 Value of supply is deemed to be the consideration in money which is

equivalent to the cash benefit in terms of the Income Tax Act.
  Time of supply: Where the benefit is considered on a monthly basis in
terms of the income tax act, then the time of supply is at the end of
every month.

Taxable benefits

 Cell phone benefit

 Motor Vehicle benefit

Non-taxable benefits

 Occupation of quarters.

 Use of furniture.

 Loan.
 Entertainment.

13.14.2 Reduction in the taxable use of capital goods (section

17(2))

 Where the registered operator acquired, manufactured, assembled,

constructed or imported capital goods for the making of taxable
supplies, and their application for taxable purposes is reduced in
relation to their total application or use, then an adjustment is
required.
 A deemed supply of the amount of the increased non-taxable use
arises.
 An adjustment is necessary if registered operator at the time of
acquisition of such goods or services had been entitled to input tax
deduction.
 No such adjustment is necessary where the cost of such goods
excluding VAT is less than $60.00
 The value of adjustment is determined using the formula, AX(B-C);
 Where:
 A: represents the lesser of cost or open market value,
 B: represents the percentage taxable usage before reduction,
 C: represents the current percentage taxable usage of the goods.
 Thus (B-C) is the extent of reduction.

Question:
Taderera P/L is a registered operator. In January 2016 it purchased a
computer valued at $700 including VAT. It calculated that the computer
would be used 60% taxable supplies and 40% non-taxable supplies and
claimed input tax. By the end of December revenue in respect of taxable
supplies went down by 40% and the computer was used 80% for non-taxable
purposes. The open market value of the computer was now $900.
Required: Calculate the adjustment that needs to be done.

Solution: A = 700 B = 60% C = 20%

 The adjustment to the made will be 700 X (60% – 20%) =$280.
 Output tax thereon will be 36.52 ($280 X15/115)

13.15 Tax Invoice (Section 20)

 Invoice: a document notifying an obligation to make payment.

 Tax invoice: a document provided as required by the Act to enable the

registered operator to claim input tax

13.15.1 Requirements for Tax Invoice

 In practice, a registered operator is normally required to issue a tax
invoice which satisfies the requirements of the Commissioner and the
requirements of the contracting parties.

 A registered operator is required to issue a tax invoice within 30 days

from the date of supply, but it may not be necessary to issue a tax
invoice where the consideration in money does not exceed $10.

 However, in such cases, some type of source document is required in

order to claim input tax e.g. till slip, petty cash slip etc.

 A tax invoice is a special tax document and certain details about the
taxable supply to which it relates must be stated on the tax invoice.
(See below for details).

13.15.2 Requirements: tax invoice (Section 20 (4))

 The words “TAX INVOICE” in a prominent place

 Name, address and VAT registration number of the supplier

 Name, address and VAT registration number of recipient

 Individual serialised number and date of issue

 Description of goods and /or services

 Quantity or volume of goods or services supplied

 Price & VAT **

** There are 3 methods allowed for reflecting the price & VAT as follows: -

Method 1 Method 2 Method 3

The amount Where VAT is included in Where VAT is included
excluding in
the final price, the
VAT, plus the VAT the final price, the
consideration, together amount
charged and the with
amount charged including VAT
a statement that VAT is and
including VAT
included and the rate of the amount of VAT
tax. charged

13.15.3 Copies of Tax Invoices

 A registered operator is not allowed to issue more than one tax invoice
for a single supply.

 If the need arises for him to issue another tax invoice for same supply,
he is only allowed to issue a copy invoice clearly marked “copy”.

 A facsimile of a tax invoice or a copy sent by e-mail is not acceptable

as a basis for claiming input tax.

13.15 Credit and Debit Notes(Section 21)

 Credit notes are often issued by a supplier when the consideration for
a supply is reduced.

 Debit notes are also issued by the supplier when the consideration is
subsequently increased.

 The issue of a debit note or credit note when a tax invoice has
previously been issued is generally used to show the increase or
decrease in tax (as the case may be) on the supply.

 This is done whether or not the supplier accounts for tax on an invoice
or payments basis.

 The issue of a credit note is not required when a prompt payment

(settlement) discount is the reason for the reduction in the
consideration, provided the terms of that discount are clearly shown on
the tax invoice.

13.15.1 Requirements for Credit and Debit Notes

 Credit and debit notes are required to be issued in one or more of the
following circumstances: -

 The cancellation of a supply of goods or services.

  The nature of that supply of goods or services has been fundamentally
varied or altered.

 The previously agreed consideration for the supply of the goods or

services has been altered by agreement with the recipient (including a
discount).

 Part of or all the goods or services are returned to the supplier.

 This does not apply on returnable containers, unless such containers

form part of the goods supplied on which a tax invoice was issued by
the supplier to the recipient and the supplier has:

 Issued a tax invoice and the tax charged is incorrect as a result of the
above mentioned circumstance(s) or
 Furnished a VAT return in which he accounted for the incorrect amount
of output tax as a result of the above mentioned circumstance (s).

13.15.2 Details to be reflected on Debit/Credit Notes

 The details are almost exactly the same as the details for a tax invoice,
however the amount of the adjustment (consideration and VAT) must
also be reflected and it must refer to the original tax invoice which is
going to be affected by the adjustment i.e. invoice date and number.

13.15.3 Adjustments in respect of Debit/Credit Notes

 The VAT Act makes provision for debit and credit notes to be issued in
respect of a single supply.

 It must be remembered that the consideration for a supply can only be

altered by means of a debit or credit note.

 It is not correct practice to merely issue another tax invoice in the

same way that it is an offence to issue more than one tax invoice for a
supply.

 The rule for reflecting the VAT in respect of debit and credit notes is as
follows:-

 Credit notes issued and debit notes received are to be reflected as

input tax on the VAT return.

 Debit notes issued and credit notes received are to be reflected as

output tax on the VAT return.

 Credit notes issued may not be offset against the sales made or debit
notes set off against purchases.
  However, when a debit/credit note is issued in the same tax period in
which the supply has taken place, then the amount of such debit/credit
note may be set off against the consideration.

 This concession is to allow for the computerised accounting packages

of certain industries, which would automatically offset the amounts.

13.16 Irrecoverable debts (section 22)

 Where a registered operator makes a credit supply and the amount

becomes irrecoverable, the registered operator can claim input tax on
the irrecoverable debt provided that all of the following conditions are
met:

 The supply was a taxable supply.

 A return was furnished or submitted and VAT was properly accounted
for in respect of such supply.

 The debt has been written off from the books of accounts

 In the case of an installment credit agreement, the deduction is

restricted to the VAT the cash value that has become irrecoverable.

 The tax fraction is applied to the outstanding balance of the cash value
after removing the finance charges and interest.

 Where a registered operator transfers an account receivable on a non-

recourse basis to another person, no deduction is allowable.

 The factoring of debt by a registered operator discounting his debts on

a non- recourse basis does not give rise to an input tax deduction.

 On the other hand, where account receivables are transferred at face

value on a recourse basis, an input tax deduction may be made but
only when the account receivable is transferred back to the owner.

 Where the registered operator has repossessed the goods, or accounts

for VAT on payment basis, no input tax deduction will be allowed.

 Section 22(3), if the registered operator subsequently recovers some

or the entire amount previously written off, output tax should be
accounted for.

 Section 22(4), Where a registered operator who is on an invoice basis

has claimed input tax but at the expiry of 12 months has not paid the
full consideration in respect of that supply, output tax should be
accounted for, but contracts in respect of payment terms should be
respected.
13.16 Registration for VAT (Section 23).

 Any person who on or after the “fixed date” (effective date of the VAT
Act) carries on or intends to carry on any trade (s) and whose taxable
value of supplies exceed or is likely to exceed $60,000.00 or the
prescribed amount is required to register for VAT in terms of section 23
of the Act.

 It is the person not the trade, who is registered for VAT.

 A person is only registered once for all the trades/divisions/branches

carried on; unless permission is granted to register them separately
(branch registration repealed w.e.f. 1.1.10).

13.16.1 Liability for Registration

 A person is liable to register if: -
 At the end of any month, the total value of supplies of goods or
services (turnover) has exceeded $60,000.00 per year or the
prescribed amount in the preceding period of 12 months, or
 There are reasonable grounds for believing that the total value of
supplies of goods and services, which will be made in the following 12
months, will exceed the prescribed amount.
 Unless it can be shown that the prescribed amount was exceeded as a
consequence of: -
 The sale of stock or other assets due to any cessation of or substantial
and permanent reduction in the size or scale of any trade.
 The replacement of plant and machinery or other capital assets used in
the trade
 Abnormal circumstances of a temporary nature
 For compulsory registration, it must be completed no later than 30
days from the date on which the registration threshold has been
reached or the date it is established that the threshold is likely to be
reached.

Auctioneers and Motor Car Dealers

 Registration is compulsory regardless of turnover.

13.16.2 Voluntary Registration

 A person can apply for voluntary registration even if the total value of
taxable supplies is less than the prescribed amount per annum.

 As a general rule of thumb, it will be advantageous for a person to

register if they supply goods or services mainly to other registered
operators.
  The person must satisfy the Commissioner that they are carrying on
trade.

 The Commissioner may refuse to register a person for voluntary

registration if any of the following criteria is not met: -

 The person has no fixed place of abode or business

 The person does not keep proper accounting records

 The person has not opened a banking account

 The person has previously been registered as a registered operator

under VAT or in terms of the repealed Act (Sales Tax) and failed to
perform his duties under either Act.
 Such refusal must be communicated to the applicant in writing.

13.16.3 Cancellation of Registration (Section 24)

 A registered operator may be deregistered if: -

 If the value of his taxable supplies falls below the registration threshold

 He ceases to carry on any trade and will not carry on any trade within
12 months after that date.

 Where he has applied for registration in anticipation of commencing a

trade and has not commenced that trade.

 A registered operator has successfully applied for voluntary

registration and it subsequently appears that he has not complied with
the requirements.

 Cancellation of registration, with the approval of the Commissioner will

take effect from the last day of the tax period on which the application
is made.

 A person who ceases to be registered remains responsible for any

duties or obligations under the Act while he was registered.

13.16.4 What are the responsibilities upon registration?

 One will be obliged to comply with the following requirements of the
VAT Act:
 Keep accounting records for a period of at least six (6) years after the
tax period to which the records relate.
 Complete and submit VAT returns as required.
 Calculate and pay the VAT due to the Commissioner on or before the
due date.
  Issue tax invoices for any taxable supplies where the value is more
than the prescribed amount.
 Advise the Commissioner of any changes in business details such as
change of address, addition of new partner, cessation of trade, etc.
 Allow the Commissioner to enter the business premises and examine
goods and all business records.

13.17 Tax periods (Section 27)

 Upon registration, an operator is allocated a tax period.
 A tax period is a regular interval for which a registered operator is
required to submit returns and account for VAT.
 There are four tax periods, under which a registered operator can
submit his/ her returns, namely, category A, B, C and D.

i. Category A – Registered operators in this category are required to submit

returns for each of the two monthly periods ending on the last day of:
January, March, May, July, September and November.

ii. Category B – Registered operators allocated to this category are required

to submit returns for each of two monthly periods ending on the last day of:
February, April, June, August, October and December.

iii. Category C
 Registered operators under this category are required to submit
returns at the end of each month.
 An operator with a turnover (excluding VAT) amounting to US$240 000
p.a. is required to have this one-month tax period.
 A registered operator who apply to the Commissioner to be allocated a
one-month tax period or who is likely to exceed that amount in the
period of twelve months beginning on the first day of any such month.
 An operator who has repeatedly defaulted in performing any of his
obligations as a registered operator is also likely to be placed in this
category.

iv. Category D
 Certain registered operators carrying on seasonal activities may apply
for this tax period.
 These include:
 Any registered operator whose trade consists solely of farming
activities
 The activities of any such branch, division or separate trade consist
solely of agricultural, pastoral or other farming activities and activities
of that kind are not carried on in any other branch, division or separate
trade of the registered operator or the association not for gain.
  Any trade, branch or division of an association not for gain, which is
treated as a separate person for registration purposes and whose
activities consists solely of farming activities provided that any other
trades, branches or division of such association not for gain do not
consist of farming activities.
 The total turnover (excluding VAT) of such registered operator, from all
farming activities does not exceed or is not likely to exceed $120 000
p.a.
 The registered operator may not have been allocated a one –month tax
period (Category C).
13.18 Returns and payments

 Every registered operator is required to submit VAT return together

with the payment on or before the 25th day of the month following the
relevant tax period.

 Late submission will attract a penalty a well as interest.

 Penalty is 100% of the tax liability and interest is calculated at a rate of

10% per annum.

13.19 Format for Calculating VAT

Item Description Consideration/ Rate/Tax Output

Value of Supply Fraction tax($)

Capital Assets (Section

17(2))

Fringe benefits (Section

17(3))

Deemed supplies such as

indemnity payments
received (Section 7(7))

Credit note received-

Recipient (Section 21(2)
a)

Debit note issued –

Supplier (Section 21 (3) b)

Less: Input Tax Input

tax($)

Goods or services
(excluding 0% and
exempt supplies)

Second hands goods

(Section 15(3) a (ii)

Imported goods (Section

15(2) d)

Credit note issued

(Supplier)

Debit note received

(Recipient)

Irrecoverable debt
(Section 15(3) a (v))

Indemnity payment made

(Section 15 (3) c)

Betting transactions
(Section 15(3) c)

Tax invoice received late-

now claimed (Section
15(3) f)

Recoupment of discount
coupon accepted (Section
15(3) h)

VAT
Payable/Refundable

13.20 OBJECTIONS AND APPEALS

13.20.1 Objections

 If a registered operator is not satisfied with a decision given or

assessment or ruling made by the Commissioner, he may lodge an
objection against such decision.

 The objection must be in writing, setting out the grounds upon which it
is made.

 The client must submit the objection letter within 30 days of the date
of notice of any decision, assessment or ruling.
  The Commissioner may, after having considered the objection:

• alter the decision

• alter or reduce the assessment

• disallow or allow the objection

 Notification of such alteration, reduction or disallowance shall be made

to the client in writing.

13.20.2 Appeals

 Where the registered operator is not satisfied with a decision to an

objection, assessment or ruling made by the Commissioner, he may
appeal against such decision to the Fiscal Appeal Court or Supreme
Court.

 The appeal must be in writing and received by the Commissioner

within 30 days of the notice of alteration, reduction or disallowance of
the objection.

 The appeal is limited to the grounds of objection.

 The fiscal Appeal Court or Supreme Court may, after having considered
the appeal:

• alter the decision

• alter or reduce the assessment

• disallow or allow the appeal

Kindly note: An objection or appeal does not suspend the payment of tax,
penalty or interest.

Penalty is 100% of the tax payable while interest is 10% of the tax payable

VAT tutorial Questions

Question 1
The following information relates to Chasi Ltd, a VAT registered operator who
operates an agricultural inputs shop and provides educational services. You
are the company’s Accountant and you have extracted the following
information from the system for the tax period ending 30 June 2016. All
values include VAT where applicable.

1. Supplies of goods or services for the period were valued at

$270,000. The supplies were broken down as follows:
$
Standard rated goods 100 000
Sales of agricultural inputs 20 000
Provision of educational services 150 000

2. The following capital goods were purchased during the period:

(i)Toyota Hilux double cab $25,000. The vehicle was used in the business by
the company’s driver and is parked at the company’s premises overnight.
(ii)Stocks for the agricultural inputs shop of which 55% were purchases of
standard rated items valued at $60,000.
(iii)Salaries and wages of Lecturers at $100,000

3. The following expenses were incurred during the period:

$
Rentals 2 500
Entertainment 2 500
Electricity 500

4. A debtor who owed the company $9,000 was liquidated during the period.
A first and final liquidation distribution of 20c in the dollar was awarded to it.
The balance owing was written off as a bad debt. The debtor had purchased
standard rated goods only.
5. The cash equivalent of fringe benefits granted to employees that are
subject to VAT during the period was $1,700. This amount was not included
in the sales figure above.
6. During the period, two credit notes were issued. The first was to customer
who had purchased some manufacturing inputs, all of which were standard
rated, of $2,800 and the other one was for its long standing customer who
was provided with educational services valued at $20,000.
7. One credit note for $10,000 was received by the company during the
period.
Required:
Calculate the VAT due/refundable for the tax period ending 30 June 2016.
[Total:20
marks]
Question 2
Toi Toi limited is registered for Value Added Tax (VAT) and has business
interests in hotels and manufacturing. The following information was
extracted from records for the month of May 2015:
Income

$
Cash sales(Note 2 & 3) 112,000
Credit sales(Note 4) 120,000

Expenditure
Purchases of raw material 21,000
Accounting fees 3,000
Legal fees 2,500
Petrol and diesel 1,600
Municipal rates 200
Subscriptions 2,620
Cell phones 1,500
Motor vehicles 20,000
Entertainment 600
Office rentals 788
Telephone 1,256
Notes:
(1) All amounts are inclusive of VAT
(2) Cash sales included the sale of a computer to the company’s director at
book value of $1,000.00 while the market price was $1,200.00. Input tax was
claimed in full at the time of purchase of the computer.
(3) Cash sales also included payments made by tourists in hotel bookings of
$6,000.00.
(4) Credit sales included supplies of $56,000.00 made to non-registered
operators.
(5)The company issued debit notes valued at $2,000.00 to a non-registered
operator.
(6) Legal fees were in respect of an amount deposited with the company’s
lawyers for future services if need arises. The company does not hold a tax
invoice for the payment.
(7) Subscriptions were as follows:
$
 Medical aid 1,000
 Hotel association of Zimbabwe 500
 Mashonaland country club 620

(8) Entertainment is made up of the following items

 Meals bought from chicken inn for company employees who
exceeded the company’s monthly target for $300.
 The other $300 is in respect of expenditure incurred by the
company’s sales representative in hotel bills and food in Bulawayo on
company’s business.
(9) The company purchased a Mazda B2500 double cab and Mazda B1800
single cab for business use for $25,000 and $16,000 respectively.
(10) The five cell phones worth $1,500 were bought for the company’s
employees for use by sales representatives during business trips.
(11) 10 employees had use of company vehicles for both business and
private use. The engine capacity for all the vehicles ranged between 1,680cc
and 1,900cc.
Required:
Calculate the VAT payable or refundable for the month of May 2015