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Accounting For Indirect Taxes
Accounting For Indirect Taxes
ACCOUNTING FOR
INDIRECT TAXES
PART FIVE
VALUE ADDED TAX
(VAT) ACCOUNTING
Overview Value Added Tax
VAT is tax on Value Added to goods and services by enterprise at
each stage of the production and distribution process.
It arises whenever “Taxable person” makes supply of goods and
services in the course of his business.
In some countries it is called “Good and Service Tax” or “GST”
There are nearly 140 countries that use the VAT system, with the
average percentage being 15%.
VAT may be defined as "a tax to be paid by:
The manufacturers or
Traders of G & S is on basis of value added by them".
organization)
Manufacturer or Trader is not liable to pay the tax on the entire value of
the commodity b/c the tax base for VAT is the Value Added.
In Canada, VAT is known as “Goods and Service tax” or GST;
In Japan it is known as "Consumption Tax".
It is a tax collected from someone other than the person who actually
pays the tax.
Components of Value Added Tax
There are two principal components of VAT:
Output Tax
Input Tax.
1.Output Tax:
VAT collected on sale of taxable supplies (goods and services).
2.Input Tax:
VAT paid on purchases of taxable G and S.
VAT.
of:
Every taxable transaction by a registered person
Every import of goods, other than an exempt import
An import of goods takes place when the goods are entered
Rendition of services
provided by regulation:
aid,
The supply of electricity, kerosene, and water
The import of goods to the extent provided under Schedule 2 of the customs
tariffs regulations
The supply of goods or services by a workshop
employing disabled individuals;
The import of supply of books and other printed
materials;
The MoFED exempted the following by directive
after the proclamation:
Bread, Injera and Milk
Grains and their flours
Note: In the case of exempt supplies:
No amount of tax payable in respect of the supply or import Shall be allowed as a credit
Purchases)
Accounts
d/ce b/n
VAT charged on sales and
VAT paid on purchases of goods and services applying Zero Rate or Standard Rate.
Example1: If a taxable person purchases birr 200,000 goods and services and sales Birr
300,000 taxable supplies during the month of Nehase, the VAT liability will be :
Output Tax:
Input Tax:
Input Tax:
Domestic Purchases (230,000 @15/115) ... (30,000.00)
of VAT.
Every registered person is required:
To file VAT return with the Authority for each accounting period,
whether or not tax is payable in respect of that period;
To pay the tax for every accounting period by the deadline for filing
the VAT return.