Indirect Taxes (VAT and Sales Tax)
Core concepts
VAT is a multi-stage, destination-based tax on consumption. Candidates must know registration thresholds, taxable supplies (standard, reduced, zero-rated), exempt supplies, and the input tax credit mechanism. Distinguish output tax (on sales) from input tax (on purchases); only taxable business inputs are recoverable.
Key mechanics: place of supply (goods vs services), time of supply (invoice vs payment), reverse charge on imported services, and partial exemption for businesses making both taxable and exempt supplies.
Traps to watch
- Exempt ≠ zero-rated: zero-rated supplies allow input recovery; exempt supplies generally do not.
- Registration is based on taxable turnover, not total turnover.
- Partial exemption requires an apportionment method; do not recover all input tax.
- Place of supply rules differ for B2B and B2C services.
Rule of thumb
Net VAT payable = output tax − recoverable input tax. Check the supply's category before computing.
Worked example: Output tax 18,000; input tax 12,000, of which 2,000 relates to exempt supplies. Recoverable input = 10,000. Net VAT = 18,000 − 10,000 = 8,000.