CALCULATING VAT IN A SIMPLIFIED WAY

A. ASSUMPTION

A1. A trader takes delivery of goods after all taxes from customs or local supplier.

A2. The goods including taxes and VAT are worth Shs. 100,000/=

A3. The trader adds a mark-up (profit) to cover all expenses, profits and VAT of 18 to arrive at the selling price.

A4. It is assumed that BUSINESS INPUTS such as telephone, water, electricity and consumable are included in the mark-up in A3 above.

A5. The VAT rate is 18%.

B1. The total value of the goods (in general) if inclusive of VAT has three elements, namely:

(a) the cost element before VAT which is 90%;

(b) value added of say 10%

(c) the VAT element of 18%

B2. The total value is therefore made up of COST plus Value Added plus VAT which is (90% + 10% + 18%) = 118%

B3. In order to identify the VAT element in the total value, the VAT fraction is used. This VAT fraction is as follows:

The VAT RATE divided by COST plus Value Added plus VAT RATE which is:

18% or 18/(90% + 10% + 18%) = 118

B4. The trader only needs to remember the VAT fraction in B3 above

C. USING THE EXAMPLE IN A TO CALCULATE VAT:

C1. The objective is to get the net VAT payable to URA or refundable to the trader by URA.

C2. The net VAT payable is the difference between the VAT calculated on SALES, and that on PURCHASES.

C3. If the VAT on SALES is greater than the VAT on PURCHASES, then the TRADER pays URA the VAT on sales in excess of the VAT on purchases.

C4. If the VAT on SALES is less than the VAT on PURHCASES, then URA refunds or grants an offset to the Trader equal to the excess of VAT on purchases over VAT on sales.

C5. If the trader buys goods at Shs. 100,000/= inclusive of VAT, with a 10% mark - up the selling price becomes Shs. 110,000/=.

C6. The VAT on SALES and that PAYABLE to URA can be computed as follows:

C7. Checking the computation in C6

C8. Because the TRADER paid Shs. 15,385/= VAT in the purchases, and this was received by URA from the supplier, the VAT he collects and passes on to URA is only that on Value Added, that is Shs. 1,538/=.

Total VAT collected at the two levels of the trader's supplier and his own sales from value added totals Shs. 16,923/=.

Value added is the Input of a trader in terms of labour, packaging, display, transport, etc incurred to bring the goods to a new sellable state. It is therefore, the sum total of mark up plus overheads plus value of the work on the new products.

D. KEEPING SIMPLE BUSINESS RECORDS FOR VAT PURPOSE

D1. It should be emphasized that VAT does not need a complicated accounting system. VAT relies on SALES and PURCHASES. Only two files (BOXES) are required, namely:

(a) a SALES file (BOX) in which all sales Tax invoices are kept;
and
(b) a PURCHASES file in which all purchases Tax Invoices are kept.

These are the records that would be checked by VAT inspectors. In a nutshell, ON THE LEFT HAND SIDE, KEEP YOUR SALES RECORDS; ON THE RIGHT HAND SIDE KEEP YOUR PURCHASES RECORDS.

D2. In the above example, the TRADER recovers the VAT paid at purchase of Shs. 15,530 /=, and VAT charged on his value added (Shs. 1,538/=) from the Customer. The Customer pays the total Shs. 16,923/= (15,530 /= + 1,538/=) over and above the principle sum.

E. THE WRONG WAY OF CALCULATING VAT

E1. The example below shows how Mukasa calculated VAT in a Wrong way.

E2. Calculating VAT as in the above example is wrong. Instead of the whole system paying URA VAT of Shs. 15,983/= only, the system would pay Shs. 34,683/= (15,983/= + 19,800/=) because 18% is applied on another 18%.

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