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Value Added Tax

11.4 Value Added Tax (EMG6M)

As we learned in Chapter 4, VAT is the acronym for Value Added Tax. VAT is a form of tax that everybody has to pay when buying goods and services. It is charged as \(\text{14}\%\) of the price of the goods. The \(\text{14}\%\) is paid to the provider of the goods and services, and they in turn pay it to the government.

VAT is charged at every stage of producing and selling goods. If the person who pays tax is going to use the goods that they buy to make an income, then they can deduct the VAT that they have paid. So the final consumer pays the VAT, while the people along the chain of producing goods and services do not.

Certain items, such as basic foods, like milk, bread, fresh fruit and vegetables, maize meal and tinned pilchards are exempt from VAT, which means that they are not taxed. Educational fees, and bus, train and taxi fares are also exempt from VAT.

Vat inclusive
This is a price that includes VAT.
Vat exclusive
This is a price that excludes VAT.
Vat exempt
An item that is VAT exempt does not have VAT added to the price of the item.

Worked example 6: Calculating the VAT on purchases

Zinhle visited the Sunshine Supermarket in Wellville. After paying for her shopping, she checks her till slip and thinks that the VAT (\(\text{R}\,\text{22,05}\)) on the till slip is incorrect. She calculates \(\text{14}\%\) of \(\text{R}\,\text{186,55}\) to be \(\text{R}\,\text{26,12}\).

Show that Zinhle is incorrect by answering the following questions:

  1. Why are the tomatoes indicated with a *?
  2. What is the total cost of the items that are VAT inclusive?
  3. Is \(\text{14}\%\) of this total \(\text{R}\,\text{22,05}\) or \(\text{R}\,\text{26,12}\)?
  4. Show how the balance due (\(\text{R}\,\text{186,55}\)) was calculated.
  5. Explain why Zinhle is incorrect in believing the VAT is wrong.

  1. The tomatoes are a basic foodstuff and so they are exempt from VAT.
  2. \(\text{R}\,\text{157,51}\).
  3. \(\text{R}\,\text{22,05}\)
  4. Balance due = (total cost of VAT incl. items) + (\(\text{14}\%\) VAT on those items) + (total cost of VAT exempt items).
  5. Zinhle calculated the VAT as \(\text{14}\%\) of the total balance due, not as \(\text{14}\%\) of the VAT inclusive items only.

Zinhle was following the excellent practice of checking her till slip - sometimes they are incorrect! Let's see how this can be.

Worked example 7: Checking a till slip

Nompumelelo bought some groceries at Dicey Stores. Answer the following questions about the till slip below.

  1. Why are some items marked with a star (*)?
  2. List the items that are VAT exempt and how much each cost.
  3. On the receipt the amount of the VAT is \(\text{R}\,\text{23,73}\).

    1. What is the total cost of the VAT exempt items? Check that you agree with the total given.
    2. What is the total cost of the items that are subject to VAT (before VAT is added)?
    3. What should the VAT on this total be?
    4. Has the VAT been calculated correctly?
  1. They are VAT exempt items.
  2. Sunflower oil = \(\text{R}\,\text{14,99}\) Brown bread seed = \(\text{R}\,\text{10,99}\) Brown bread loaf = \(\text{R}\,\text{6,99}\)

    1. \(\text{R}\,\text{14,99}\) + \(\text{R}\,\text{10,99}\) + \(\text{R}\,\text{6,99}\) = \(\text{R}\,\text{32,97}\). This is correct.
    2. \(\text{R}\,\text{160,27}\)
    3. \(\text{14}\%\) of \(\text{R}\,\text{160,27}\) is \(\text{R}\,\text{22,44}\)
    4. No, they have miscalculated the VAT at \(\text{R}\,\text{23,73}\).

Calculating VAT and checking till slips

Exercise 11.4

Bongi decides to use the following formula to calculate the cost of the items before VAT, the VAT and the VAT inclusive price.

Total cost (R) = Amount before VAT (R) + \(\text{14}\%\) of the amount before VAT (R).

Complete the table below by calculating the values of a) to g). a) is the total of the Amount (R) and e) is the total of VAT (R). Show all your calculations.

Amount (R)

\(\text{8,76}\)

\(\text{8,76}\)

\(\text{21,92}\)

\(\text{6,13}\)

\(\text{0,35}\)

\(\text{17,54}\)

\(\text{24,55}\)

\(\text{28,06}\)

a.

VAT (R)

\(\text{1,23}\)

\(\text{1,23}\)

\(\text{3,07}\)

\(\text{0,86}\)

\(\text{0,05}\)

b)

c)

d)

e)

Total (R)

\(\text{9,99}\)

\(\text{9,99}\)

f)

g)

h)

\(\text{19,98}\)

\(\text{27,99}\)

\(\text{31,99}\)

\(\text{132,32}\)

a) = \(\text{R}\,\text{8,76}\) + \(\text{R}\,\text{8,76}\) + \(\text{R}\,\text{21,92}\) + \(\text{R}\,\text{6,13}\) + \(\text{R}\,\text{0,35}\) + \(\text{R}\,\text{17,54}\) + \(\text{R}\,\text{24,55}\) + \(\text{R}\,\text{28,06}\) = \(\text{R}\,\text{116,07}\)

b) =\(\text{R}\,\text{19,99}\) - \(\text{R}\,\text{17,54}\) = \(\text{R}\,\text{2,44}\)

c) =\(\text{R}\,\text{27,99}\) - \(\text{R}\,\text{24,44}\) = \(\text{R}\,\text{3,55}\)

d) = \(\text{R}\,\text{31,99}\) - \(\text{R}\,\text{28,06}\) = \(\text{R}\,\text{3,93}\)

e) = \(\text{R}\,\text{132,01}\) - \(\text{116,07}\) = \(\text{R}\,\text{15,94}\)

f) = \(\text{R}\,\text{21,92}\) + \(\text{R}\,\text{3,07}\) = \(\text{R}\,\text{24,99}\)

g) = \(\text{R}\,\text{6,13}\) + \(\text{R}\,\text{0,86}\) = \(\text{R}\,\text{6,99}\)

h) = \(\text{R}\,\text{0,35}\) + \(\text{R}\,\text{0,05}\) = \(\text{R}\,\text{0,40}\)

Bongi's friends Nthabiseng and Thato calculated e) in this way:

Nthabiseng: \(\text{14}\%\) of \(\text{R}\,\text{116,07}\) = \(\frac{\text{14}}{\text{100}} \times\) \(\text{R}\,\text{116,07}\) = \(\text{R}\,\text{16,24}\) Thato: \(\text{R}\,\text{132,32}\) - \(\text{R}\,\text{116,07}\) = \(\text{R}\,\text{16,25}\)

Why do they get different answers?

They have rounded numbers off differently. Nthabiseng incorrectly rounded down her answer of 16,2498 to \(\text{16,24}\).

Copy the slip and correct the mistakes:

VAT exempt items total: \(\text{R}\,\text{67,95}\). VAT inclusive items total: \(\text{R}\,\text{22,78}\). VAT is \(\text{14}\%\) of \(\text{R}\,\text{22,78}\) = \(\text{R}\,\text{3,19}\). Total VAT is \(\text{R}\,\text{3,19}\). Total balance due is \(\text{R}\,\text{67,95}\) + \(\text{R}\,\text{22,78}\) + \(\text{R}\,\text{3,19}\) = \(\text{R}\,\text{93,92}\).