What is VAT?

In simple terms, Value Added Tax (VAT) is a tax that you pay on most goods and services you buy. Here’s how it works:

How VAT Works

1. Added at Each Stage:
• VAT is added at each stage of the production and distribution process. For example, if a manufacturer makes a product, they pay VAT on their supplies. When they sell the product to a retailer, they add VAT to the sale price. The retailer then pays VAT on their purchase and adds VAT when they sell to you.
2. Final Consumer Pays:
• The end consumer (you) pays VAT as part of the price when you buy something. The business collects this VAT and then sends it to the government.
3. Business as a Collector:
• Businesses are responsible for collecting VAT from customers and passing it on to the government. They also keep track of how much VAT they’ve paid on their own business expenses and how much they’ve collected from sales.

Example

• Buying a Product: Suppose you buy a T-shirt for R115, which includes R15 VAT. The store collects this R15 VAT and sends it to the government.
• Selling Process: If the store bought the T-shirt from a supplier for R100 plus R15 VAT, they paid R115 in total. They can claim back the R15 VAT they paid to the supplier, so they only pay the difference (R15) to the government.

Key Points to Remember

• Tax on Consumption: VAT is a tax on what you consume, not on what you earn.
• Standard Rate: In South Africa, the standard VAT rate is 15%, but some items are zero-rated (0% VAT) or exempt (no VAT at all).
• Visibility: VAT is usually included in the price you see on the shelf, so you often don’t have to calculate it separately.

In essence, VAT is a tax that helps fund public services, and businesses play a role in collecting and managing it.