2.

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”

VAT was invented by a French Economist Maurice Laura in 1954.

It is a gov’t tax w/c is charged at each stage of production.

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".

The value added by them is the difference b/n:

 The receipts (from the sale) and
 Payments made to various factors of production (land, labor, capital and

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).

It is the VAT collected on sales.

2.Input Tax:
 VAT paid on purchases of taxable G and S.

 VAT paid on purchases

VAT Payable/ Liability = Output Tax >Input Tax

 VAT Refundable/Credit = Output Tax < Input Tax

VAT Exclusive & Inclusive Price & Determination of VAT

1. VAT Exclusive Price

 In this case, purchases & sales are made Exclusive of VAT.

When a VAT Return is prepared:

Output and Input Tax are determined by

multiplying Sales and Purchases Price by the
existing VAT Rate.

VAT = VAT Exclusive Price @ VAT Rate

2. VAT Inclusive Price –
 In this case, purchases and sales are made inclusive of VAT.

When a VAT Return is prepared:

 Output and Input Tax is determined by multiplying sales and

purchases by the Ratio of VAT Rate to 1 Plus VAT Rate;
 Example: If VAT Rate is 15%, Sales and Purchases Price
which are VAT Inclusive are multiplied by 15/115 which is the
same as 0.15/1.15)
 VAT = [VAT Inclusive Price] @ [VAT Rate / (1 + VAT Rate)]
 Legal Provisions on VAT in Ethiopia
The legal provisions are taken from VATP No. 979/2016 and
VATR No. 79/2002.
 The Concept in Ethiopia

VAT is payable on taxable supplies made in Ethiopia by a

taxable person in the course or furtherance of the taxable
activity during an accounting period.

The Analysis of this legal point is as follows:

 Taxable Supplies made in Ethiopia

 Taxable person – refers to a taxpayer for VAT Purposes

Course or furtherance – an activity undertaken to:
 Develop
 Advance and
 Progress taxable activity by a taxable person is
assumed to be undertaken in the course or furtherance
of taxable activity.
 Taxable Activity - any activity, which is carried regularly by

any taxable person in Ethiopia

 Accounting Period – is a calendar month. 

 VAT Registration in Ethiopia
It is classified into two:
 Mandatory
 Voluntary
1. Mandatory Registration
Any person:
 Conducting a commercial enterprise or
 Intending to conduct a commercial enterprise may apply to get
registered for VAT.
The term any person for purposes of VAT registration includes:
 Sole proprietor
 Company, Partnership
 Estate of the Deceased
 Trust
 Incorporated Body or Unincorporated Body or
 Club or Association, etc.
If gross sales value for 12 months, > Br 1,000,000:

 The person conducting the enterprise must

register for VAT with VAT Department of the
ERCA.
 It is calculated ongoing basis.

Turnover related to exempt supplies is not to be

included in compulsory VAT registration.
 2. Voluntary Registration

A person who carried on taxable activity and is not

required to get registered for VAT, may voluntarily apply

to the Authority for such registration:

 If the person is regularly supplying or rendering at

least 75% of his G and S to registered persons 

 Benefits of Voluntary Registration

Input VAT can be recovered if a person is registered for

VAT.

It will be therefore, beneficial to voluntarily register

where the person makes mainly zero-rated supplies.

 In such case, Input VAT will be recovered and no VAT

will be charged on zero-rated output.

 Imposition of Tax
Those w/c subject to the provisions of the VATP:

There shall be levied and paid tax at rate of 15 % of value

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

into the customs declaration.

 Zero-Rated Supplies
The following taxable transactions shall be charged with
tax at a rate of Zero percent:

Export of Goods or Service to extent provided

in regulations
Rendering of transportation or other services
directly connected with international transport
of goods or passengers
The supply of gold to the NBE
Note: On Zero Rated supplies, the registered
person can claim the Input Tax Credit on
purchases either it is domestic or import.
The input VAT will be recovered but no Output
Tax will be reported for the sales.
 Exempt Supplies (Transactions)
The following types of:
 Supplies of goods (other than by way of export)

 Rendition of services

 Imports of goods, are exempt from payment of VAT to the extent

provided by regulation:

 The sale or transfer of a used dwelling, or lease of a dwelling

 The rendering of financial services

 The supply or import of National Or Foreign Currency (except

for that used for numismatic purposes), and of securities

 The import of gold to be transferred to the NBE
 The import or supply of prescription drugs and medical services

 The rendering of educational services provided by educational institutions,

 The supply of goods and rendering of services in the form of humanitarian

aid,
 The supply of electricity, kerosene, and water

 Goods imported by the government

 Supplies of services by the post office

 The provision of transport be it public or freight

 Permits and License Fees

 Rendering by religious organizations of religious or church related services

 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:

 There is neither Input Tax nor Output Tax.

 This is to say that:

 No tax is collected when a person sells exempt goods and services

 No tax is paid when a person purchase exempt supplies.

Standard Rated Supplies

These are:
 Supplies of goods or
 Provisions of services which are neither :
 Exempt nor zero-rated
 Taxable at the standard rate of 15%.
 Mixed Supplies
A supply of goods or rendering of services:

 Which is related to a (main) supply of goods or

rendering of services, is treated as part of the latter.
The rendering of services incidental to an import of
goods is part of the import of goods.
A taxable trns. involving independent elements, one or
more of which involves the separate supply of goods or
rendering of services, which would be exempt from tax,
is treated as separate transactions.
 Adjustment of the Value of a Taxable
Transaction
In relation to a taxable transaction made by a registered person:
 Adjustment of value of a Taxable Transaction is allowed where:

 The transactions cancelled

 The nature of the transaction is changed
 Previously agreed consideration for the transaction is
altered, whether due to a reduction of prices or for any
other reason
 The goods or services are returned in full or in part to the
registered person.
 Input Tax Credit
VAT creditable is the amount of VAT paid by a registered
person in respect of tax invoices or Customs Declarations
issued to the person for:

Imports of good that take place during current

accounting period
Taxable transactions involving supply of goods or
rendering of services that are considered to take place
during the current or preceding accounting.
Where only a part of the supplies made by a registered person during a tax

period are taxable transaction:

 The amount of tax creditable for that period is determined as follows:

 In respect of a supply or import received to make taxable transactions:

 Full amount of tax paid on supply or import shall be allowed as a credit

 In respect of a supply or import received to make exempt transaction:

 No amount of tax payable in respect of the supply or import Shall be allowed as a credit

 In respect of a supply or import received which is used both for making of

taxable and exempt transactions:

 The rules of apportionment of the credit shall be determined by a directive to be

issued by the Minister or Revenue

 No Credit is allowed for VAT
On a taxable transaction to, or import by, a person of a
passenger vehicle
 Unless the person is in business of dealing in, or hiring of, such
vehicles
 Unless the person is engaged in the business of transporting
passengers

On a taxable transaction, or import by, a person of G or S

acquired for the purposes of entertainment or providing
entertainment
 Unless the person is in business of providing entertainment.
 VAT Refund
If at least 25% of the value of a registered person's taxable
transaction for accounting period is taxed at a zero rate:
 Tax authority shall refund the amount of VAT applied as a credit:

 In excess of amount of VAT charged for the accounting

period:
 Within a period of two months after the registered
person files an application for refund
 Accompanied by documentary proof of payment of
excess amounts.

The Authority is not obliged to refund if the amount to be

refunded is < 50 Birr.

 Accounting for VAT

A tax accountant shall:

 Identify records to be kept for VAT purposes (Sales &

Purchases)

 Determine the VAT Liability

 Record VAT Related Transactions in the Books of

Accounts

 Preparation of VAT Return

 
 Record Keeping
A registered person or any other person liable for tax
under VAT proclamation:
 Shall maintain for 10 years in Ethiopia the following.
 Original tax invoices received by taxable person
 A copy of all tax invoices issued by taxable person
 Customs documentation relating to imports & exports by
person
 Accounting records
 Any other records as may be prescribed by the ERCA and
useful to determine the VAT Liability
 Determination of the VAT Liability

Amount of tax payable by a person who is registered or is required to register is

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:

300,000 @ 15 % .................................. 45,000

Input Tax:

200,000 @ 15% ................................. 30,000

VAT Liability .............................. 15,000

Example 2: Kombolcha Textile Factory S.C. made
taxable sales of Birr 80,000 during the month of June
2006. It also made taxable purchases of Birr 50,000 and
imported Birr 10,000 during the same month.
Required: Determine VAT Liability or VAT Refund
assuming all the prices are VAT Exclusive and VAT Rate
is 15%
 
 Solution:
Particulars Amounts

Output Tax (80,000 *15%) ..…………….. 12,000.00

Input Tax:

Domestic Purchases (50,000 *15%) … (7,500.00)

Imported Inputs (10,000 * 15%)……….. (1,500.00)
VAT Liability (Output Tax – Input Tax) 3,000.00
 Journal Entry:
a. Cash …………………………… 92,000
Sales ……………………………….. 80,000
VAT ………………………………….. 12,000
b. Purchases ………………………… 50,000
VAT …………………………………. 7,500
Cash …………………….………. 57, 500
c. Purchase …………………………. 10,000
VAT ………………………………….. 1,500
Cash ……………………………. 11,500
Example 3: Tabor Ceramics S.C made taxable purchases
of Birr 230,000 and Birr 138,000 taxable import. It also
made taxable sales of Birr 345,000.
 Required: Determine VAT Liability or VAT Refund
assuming that the prices are VAT inclusive and a VAT rate is
15%.
 Particulars Amounts
Output Tax (345,000 @ 15/115) ……………….. 45,000.00

Input Tax:
Domestic Purchases (230,000 @15/115) ... (30,000.00)

Imported Purchases (138,000 @ 15/115)… (18,000.00)

VAT Refund (Input Tax – Output Tax).…. 3,000.00
Journal Entries:

a. Cash ……………………………. 345,000

 Sales …………………………….. 300,000
 VAT ……………………………… 45,000
a. Purchase ……………………….. 200,000
VAT ………………………………. 30,000
Cash …………………………... 230,000
b. Purchase …………………………. 120,000
VAT ………………………………… 18,000
Cash ………………………………….. 138,000
 Value of Taxable Imports
The value of taxable imports for taxation is the CIF Value
plus customs duty and excise tax paid up on the import
of the goods in to Ethiopia, excluding VAT and Income Tax
Withholding.
Value of Taxable Import = CIF + Customs duty + Excise
Tax
VAT = 15% ( CIF + CD + ET)
Example: Assume that Zemach PLC imported machinery
with a cost of Br. 24,000, insurance Br. 5,000 and freight
cost of Br. 11,000. The customs duty and excise tax are Br.
25,000 and 35,000, respectively.

Required: Determine the amount of:

a. Withholding tax paid at customs clearance
b. VAT paid at customs clearance
 Preparation of VAT Return
Preparation of VAT Return is compulsory.

When filling of VAT Return, it should be accompanied by payment

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.

For the accounting period Meskerem, the VAT Return must be

filed till 30th of Tikmet.

Thank
You!!!
 Quiz II
1. Explain VAT briefly.
2. Assume that XY Company sold its taxable
products at Br. 1,500,000. The company previously
purchased the products by Br. 250,000 and others
imported by Br. 300,000.
Required: Determine the VAT Liability or VAT
Refund assuming that all are VAT inclusive.