Notes on Value Added Tax (VAT)

Value Added Tax (VAT) Definition and Overview

VAT, or Value Added Tax, is a tax charged on the price of certain goods and services. It is an indirect tax that producers and sellers add to the price of their products or services paid by the consumer. In South Africa, the current rate of VAT is 18%.

Key Points on VAT

  • VAT is applied as a charge added to the purchase price of goods and services.
  • The acronym 'VAT' stands for Value Added Tax, which indicates that the tax is applicable at different stages of the production and sales processes, where value is added at each stage.

Notable Terms

  • N.B: The symbol * or * is used to denote Non-Taxable or VAT Exclusive items, which indicates items that do not incur VAT charges.

VAT Calculations

To calculate VAT-related amounts, specific formulas are used depending on whether the VAT is being included or excluded from the price:

  1. To include VAT in a price: multiply the price by a factor that incorporates VAT. This can be determined by the formula:
    extPriceIncludingVAT=extPriceimes(1+extVATRate)ext{Price Including VAT} = ext{Price} imes (1 + ext{VAT Rate})
       Given that the VAT rate is 18%, this implies:
    extPriceIncludingVAT=extPriceimes1.18ext{Price Including VAT} = ext{Price} imes 1.18
  2. To exclude VAT from a price: divide the price by a factor that removes the VAT component. The appropriate formula is:
    extPriceExcludingVAT=extPriceimes100118ext{Price Excluding VAT} = ext{Price} imes \frac{100}{118}
       Thus, it can be simplified as:
    extPriceExcludingVAT=extPriceimes0.847457ext{Price Excluding VAT} = ext{Price} imes 0.847457
  3. To calculate VAT only (i.e., the tax amount): multiply the price by the fraction that directly determines the VAT component:
    extVATAmount=extPriceimes0.15ext{VAT Amount} = ext{Price} imes 0.15

Examples of VAT Calculation

  1. For an example on chocolate sold at R 115 (VAT included), to find the VAT amount:
       - Using the formula to find VAT:
    extVAT=R115imes0.15=R19.55ext{VAT} = R 115 imes 0.15 = R 19.55
  2. If the chocolate price was R 108 (VAT included), to find the VAT amount:
       - Using the same method:
    extVAT=R108imes0.15=R17ext{VAT} = R 108 imes 0.15 = R 17
  3. For a simple scenario, if the VAT exclusive price is R 116, to find how much VAT is charged:
       - To calculate the VAT:
    extVAT=R116−(R116imes0.847457)=R116imes0.15=R17.40ext{VAT} = R 116 - (R 116 imes 0.847457) = R 116 imes 0.15 = R 17.40
  4. If a specific price of R 10 is considered:
       - The VAT on R 10 would be:
    extVAT=R10imes0.15=R2.65ext{VAT} = R 10 imes 0.15 = R 2.65