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VAT: A Neutral Tax
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Value Added Tax (VAT) is neither a cost nor a profit for VAT registered businesses.
A number of businesses are generally concerned that VAT may bring about a substantial increase to the cost of their
businesses. It is important to highlight therefore that VAT does not lead to an increase in the cost of doing
business. VAT has a deduction mechanism (input tax credit) which means that businesses will be able to offset the
VAT they have paid on purchases and expenses (input tax) against the VAT they have collected on their sale
(output tax). If a VAT registered business has incurred VAT when making purchases and expenses in the course of
making business, all of the VAT incurred in relation only to the taxable supplies will be reimbursed to the business.
No cost will have been borne by the business.
A business that charges VAT to its customers has to ensure that they charge VAT at the correct amount. Since
VAT is a consumption tax on the sale of goods and services, the VAT collected by businesses is offset against the
VAT incurred on purchases and expenses made when doing business and the difference is remitted to SRC. VAT should
be remitted to the government and not be retained as personal profit by any business.
The table below shows how VAT is neutral for a business. Basic Items Pty is a VAT-registered supermarket
(retail business) based in town computing its VAT liability in the month of July 2012.
*(Recall that in order to calculate the VAT amount in a VAT-inclusive price the formula used is: VAT-inclusive
amount x 15/115, therefore, 50 000 × 15/115 = 6 522).
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Summary of the Table
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In order for VAT to be levied on the taxable supplies that Basic Items Pty uses to operate its supermarket; the
taxable supplies have to be purchased from another VAT registered business. As public utilities are zero-rated under
the Value Added Tax Act 2010 there is no VAT to deduct on PUC invoices. The total input tax credit that Basic Items Pty
will receive for the month of July 2012 is the sum of all of the VAT incurred in the month of July 2012 which is
SR 20 219 (6 522 + 13 044 + 653). Basic Items Pty charges VAT to its customers on the sale of its goods in the
supermarket. Basic Items Pty is able to offset its input tax against its output tax: SR 260 870 – SR 20 219
and the difference, which is SR 240 651, is remitted to SRC.
Basic Items Pty will have not incurred any VAT cost when making its business nor will it make additional profit
from the VAT collected. VAT is therefore a neutral tax and is neither a cost nor a profit to the business.
Other input taxes which can be offset include:
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VAT on annual premium insurance
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VAT on importation of goods imported to be sold
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VAT on services purchased for the business
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For more information
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Please contact Seychelles Revenue Commission on 4293737 or email us at advisory.center@src.gov.sc.
The Value Added Tax Act, 2010 is available here.
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