Value Added Tax is an indirect tax on the consumption on goods and services. As a rule, VAT is calculated at all stages of the supply chain and on the import of goods and services from abroad. The final consumer, who is not registered for VAT, absorbs VAT as part of the purchase price.
The terms “output tax” and “input tax” are key to the VAT system, and are explained as follows:
- Output tax is the VAT that is to be calculated and collected on the sale of goods and services. Output tax is charged on supplies of goods and services to other persons engaged in trade or business and to the ordinary consumer. Non-registered entrepreneurs are not permitted to calculate or indicate VAT in the sales document.
Output tax is also calculated when a taxable person transfers goods or services from his own business for personal use or for other purposes outside the scope of the VAT Act. (See sub-section 4.4 in Section 4 “Withdrawal of goods and services”.)
- Input tax is the VAT that accrues on the purchase of taxable goods or services. Taxable persons receiving goods and services liable to VAT are entitled to deduct the VAT charged in their VAT accounts. For details concerning the scope of deduction, claims and the conditions that must be fulfilled in order to deduct VAT see Section 8 “Deductions and refunds”.
Even though VAT is calculated at all stages of the supply chain as far as the end consumer, this does not mean that VAT represents an expense for each individual stage. The VAT due at each stage of the supply chain amounts to the difference between output tax and input tax. This net VAT relates to the value added to the goods or services at the stage in question. Because taxable persons are entitled to deduct input tax on their purchases, the full level of VAT will not be charged until the sale to the end-consumer.
Persons engaged in trade or business whose annual turnover from supplies of taxable goods and services exceeds certain limits (taxable persons) are obliged to register for VAT. This subject is dealt with in Section 3 “Taxable persons” and Section 10 “VAT registration”.
In principle, all sales of goods and services are liable to VAT. However, some supplies are exempt (without a credit for input tax), which means that such supplies fall entirely outside the scope of the VAT Act – see Section 5 “Exemptions”. Businesses that only have such supplies cannot register for VAT, and are not entitled to deduct VAT.
Some supplies are zero-rated (exempt with a credit for input tax). When a supply is zero-rated, it means that the supply falls within the scope of the VAT Act, but output VAT shall not be calculated as the rate is zero – see Section 6 “Zero-rated supplies”. The provisions of the VAT Act apply in full for such supplies, including the regulations relating to deductions for input VAT.