Value Added Tax (VAT)

Posted in Know How

Taxes are important sources of public revenue. The existence of collective consumption of goods and services necessitates putting some of our income into government hands. Such public goods like roads, power, municipal services, and other public infrastructures have favorable results on many families, business enterprises, industries and the general public. Thus, Ethiopian revenue and customs Authority (ERCA) is working with a vision of creating convenient situation for developmental investors and providing technologically assisted tax administration system; that can eliminate rent seeking.

Thus, two major types of taxes existing in Ethiopia, this are direct and indirect taxes

VAT is a tax on consumer expenditure. It is collected on business transactions and imports.  A taxable person can be an individual, firm, company, as long as such a person is required to be registered for vat.

Most business transactions involve supplies of goods or services.VAT is payable if they are:

Supplies made in Ethiopia;

Made by a taxable person;

Made in the course or furtherance of a business;

Are not specifically exempted or zero-rated.

The Value Added Tax would belevied at the rate of 15% of the value of:

Every tax able transaction by a registered person;

Every import of goods,other than an exempt import; and

Import of services.

A person who carries on taxable activity and is not registered is required to file an application for VAT registration with the Authority if:

Attheendofanyperiodof12calendarmonthstheperson made  ,  during  that  period,  taxable  transactions  the  total value ofwhich exceeded 500,000Birr;or

  Atthebeginningofanyperiodof12calendarmonthsthere are  reasonable  groundsto  expect  that  thetotal  value  of taxable transactions to be made by the person during that period will exceed 500,000Birr.

Registration procedure:

  A person applying to register for VAT is required to do so in such  a  form  as  is  established  by  the  implementation directives issued by the Ministry of Revenue;

When a person carrying out taxable transactions files an application to be registered for VAT, the Authority is required to register the person in the VAT register, and to issue a Certificate of registration with in 30 days of the registration;

  A person registered for VAT is required to use his tax payer identification number on all VAT invoices, and on  all tax returns and official communications with the Authority.

There is a VAT invoice prepared by the Ministry of Revenue containing the following information:

Full name of the registered person and the purchaser,and the registered;

Persons trade name, if different from the legal name;

Tax payer identification number of the registered person and the purchaser;

Number and date of the VAT registration certificate;

Name of the goods shipped or services rendered;

Amount of the taxable transaction;

Amount of the excise on excisable goods;

Sum of the VAT due on the given taxable transaction;

Issue date if the VAT invoice, and

Serial number of the VAT invoice.

The registered person is required to issue the VAT invoice to the purchaser of goods or services upon the supply or rendering, but not later than 5 days after the transaction.

Voluntary Registration

A person who carried on taxable activity and is not required to be registered for VAT, may voluntarily apply to the Authority for such registration, if he regularly is Supplying or rendering at least 75% of his goods and services to registered persons.

Record Keeping Requirement:

A registered person or any other person liable for VAT under the proclamation shall maintain for 10years in Ethiopia:

Original tax invoices received by the person;

Copy of all tax invoices issued by the person;

Customs documentation relating to imports and exports;

Accounting records; and

Any other records as may be prescribed by the Minister of Revenue by directive.

Administrative Penalties:

The following penalties are imposed for violations of the VAT Proclamation:

  Where any person engages in taxable transactions without VAT  registration  where  VAT  registration  is  required  – 100% of the amount of tax payable for the entire period of operation with out VAT registration;

Where any person issued incorrect tax invoice resulting in a decrease in the amount of tax or increase in accreditor in the event of the failure to issue at ax invoice–100% of the amount of tax for the invoice or the transaction;

Where a person who is not registered for VAT issues a tax invoice–a penalty of 100% of the tax which is indicated in the tax invoice and is due for transfer to the budget but has not been transferred; and

Where a person fails to maintain records required – 2,000 Birr for each month or portion there of that the failure Continues.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax under payment for each month (or portion there of) during which the failure continues,upto 25% of such amount.The penalty is limited to 50,000 Birr for the first month (of portion there of) in which no return is filed. If any amount of tax is not paid by the due date,the person liableis obliged to pay interest on such amount for the period from the due date to the date the taxis paid.The interest is set at 25% over and above the highest commercial lending interest rate that prevailed during the preceding quarter.The following types of supplies of goods (other than by way of export) or rendering of services, as well as the following types of imports of goods are exempt from payment of VAT:

Sale, transfer or the lease of a used dwelling;

Rendering of financial services;

Supply/import of national/foreign currency and of securities;

Import of gold to be transferred to the National Bank;

Rendering of religious organizations or church services;

Importorsupplyofprescriptiondrugsspecifiedindirectives issued by Minister of health, rendering of medical services;

Educational services provided by educational institutions or child care services forchildren at pre-school institutions;

Supply of goods and rendering of services in the form of humanitarian aid,as well as import of goods transferred to state agencies of Ethiopia and public organizations for the purpose of rehabilitation after natural disasters, industrial accidents,and catastrophes;

Supply of electricity, kerosene,and water;

Goods    imported    by    the    government,    organizations, institutions  or  projects  exempted  from  duties  and  other import taxes to the extent provided by law or by agreement;

Supplies by the post office authorized under the Ethiopian Postal Services Proclamation,other than services rendered for a fee or commission;

Provision of transport; Permitsand license fees;

  Supply  of  goods  or  services  by  a  workshop  employing disabled individuals if more than 60 %of staff are disabled;

  Importor supply of books and other printed materials

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