What is value added tax?
VAT is a general tax on consumption expenditure that is levied on the value added that has been created at various stages in the production-distribution chain.
What is value added?
Valued added is the difference between the business’s purchases of inputs and sales of output.
Assuming that a business produces a carton of soap sold for MK20, 000 from inputs such as soda, palm oil etc bought at MK15, 000, the value added would be MK20,000-MK15,000=MK5,000. VAT would be charged on this value (MK5, 000).
Similarly, if a distributor ships and sells one tonne of sugar at Mk200, 000 from a factory price of MK160, 000, value added would be Mk200, 000-Mk40, 000. VAT is chargeable on this value (Mk40, 000).
How is VAT collected?
VAT is collected by registered businesses that act as agents of the Malawi Revenue Authority (MRA) at all points in the chain of production and distribution. When the registered person purchases goods and services for his/her business from another registered person or imports goods or services, he/she will receive a VAT invoice or a copy of the import bill of entry showing the amount of VAT paid on those goods and services.
A registered person who makes taxable supplies must deduct VAT and remit to MRA by the 25th day of the month to which the return rates.
Who is liable to register for VAT?
Any person who makes table supplies of goods or services and whose business turn over is or exceeds MK2 million per year is obliged to register for VAT by completing Form VAT 1. Registration for VAT can be done at any MRA office nearer to the trader. When one is registered for VAT, he/she would be given a registration certificate, which must be displayed or exhibited permanently at the principal place of business.
When should a businessperson apply for VAT registration?
Any businessperson who qualifies as a taxable person or has grounds to believe that he/she will qualify as a table person is liable to apply for registration to MRA. The person must apply to MRA for registration within 30days of becoming liable or qualified to register for VAT.
What should a registered person do after registering for VAT?
When one is registered for VAT, he/she should start keeping business records of VAT paid and charged immediately after they are registered. These include records of all supplies made or received.
For all purchases and sales, VAT invoices must be properly recorded and filed since they show the amount of VAT paid on the goods and services. In addition, all bills of entry for imported goods showing the amount of VAT paid must be recorded properly and filed. A summary of VAT paid and received for the period covered by the return should be maintained.
Can a firm register for VAT even if its taxable supplies fall below the MK2 million per annum limit?
One can register even if its taxable supplies are lower than MK2 million. This is called voluntary registration. For one to qualify for voluntary registration, he/she must:
1. have a fixed place for conducting business
2. Keep proper accounting records for all transactions
3. Be in a position to file regular and reliable returns as required by the law.
What will happen to a businessperson who qualifies to register for VAT but does not do so?
The businessperson will be liable to a fine of MK100, 000 and imprisonment for five years upon conviction for deliberate or reckless failure to register. In addition, the business or individual will be liable to pay the amount of tax not collected on taxable supplies made from the date the registration was due.
