VAT and GST Exemptions and Zero-Rating
Expert-defined terms from the Executive Certificate in Value-Added Tax (VAT) and Goods and Services Tax (GST) course at Stanmore School of Business. Free to read, free to share, paired with a globally recognised certification pathway.
**Accrual Method** #
**Accrual Method**
The accrual method is a accounting system in which revenues and expenses are rec… #
In the context of VAT and GST, the accrual method is used to determine the taxable amount for a tax period. This means that businesses must account for VAT or GST on their sales and purchases, even if they have not yet received payment or paid their suppliers.
**Cash Method** #
**Cash Method**
The cash method is a accounting system in which revenues and expenses are record… #
In the context of VAT and GST, the cash method is an alternative to the accrual method that businesses can use to determine the taxable amount for a tax period. This means that businesses must account for VAT or GST on their sales and purchases only when they receive payment or pay their suppliers.
**Compulsory Registration** #
**Compulsory Registration**
Compulsory registration is the requirement for businesses to register for VAT or… #
The threshold varies by country, but it is typically set at a level that captures most businesses that are engaged in significant economic activity. Compulsory registration ensures that businesses pay the correct amount of tax and that they are able to claim input tax credits for the VAT or GST they incur on their business inputs.
**Exempt Supplies** #
**Exempt Supplies**
Exempt supplies are goods or services that are not subject to VAT or GST #
This means that businesses that make exempt supplies do not charge VAT or GST on those supplies, and they cannot claim input tax credits for the VAT or GST they incur on their business inputs. Examples of exempt supplies include certain financial services, residential rentals, and educational services.
**Input Tax Credit** #
**Input Tax Credit**
An input tax credit is a credit that businesses can claim for the VAT or GST the… #
This means that businesses can reduce the amount of VAT or GST they owe to the government by the amount of input tax credit they are entitled to. Input tax credits are available only for businesses that are registered for VAT or GST, and they are subject to certain conditions and restrictions.
**Output Tax** #
**Output Tax**
Output tax is the VAT or GST that businesses charge on their taxable supplies #
This means that businesses must include output tax in the prices they charge their customers, and they must remit the output tax they collect to the government. Output tax is calculated as a percentage of the taxable amount, and it is usually shown separately on invoices and receipts.
**Reverse Charge Mechanism** #
**Reverse Charge Mechanism**
The reverse charge mechanism is a way of accounting for VAT or GST that shifts t… #
This is typically used when a supplier from one country makes a taxable supply to a customer in another country. The customer is then responsible for charging and paying the VAT or GST on the supply, as if they were the supplier.
**Taxable Supplies** #
**Taxable Supplies**
Taxable supplies are goods or services that are subject to VAT or GST #
This means that businesses that make taxable supplies must charge VAT or GST on those supplies, and they are entitled to claim input tax credits for the VAT or GST they incur on their business inputs. Taxable supplies are generally defined broadly, and they include most goods and services that are traded in the course of business.
**VAT and GST Exemptions** #
**VAT and GST Exemptions**
VAT and GST exemptions are situations in which goods or services are not subject… #
Exemptions are typically granted for specific policy reasons, such as to promote social or economic objectives. For example, some countries exempt basic food items from VAT or GST to make them more affordable for low-income households.
**VAT and GST Zero #
Rating**
VAT and GST zero #
rating is a way of accounting for VAT or GST in which the tax rate is reduced to zero, rather than being eliminated entirely. This is typically used for certain types of exports, or for goods or services that are supplied to specific groups of customers, such as charities or international organizations. Zero-rating allows businesses to charge and collect VAT or GST on the supply, but at a rate of zero, so they do not have to pay any tax to the government.