FINANCE minister Mthuli Ncube proposed to revise the VAT rate from 14.5 percent to 15 percent with effect from January 1, 2023. This comes three years after a downward revision from 15 percent to the current 14.5 percent.
The reduction or increase in the VAT rate triggers transitional time of supply rules. The change in the VAT rate was a big show from the government at a time when the country’s economy is slowly trying to recover.
This, according to the minister is a long overdue enactment as Zimbabwe was the only country in the SADC region with a low VAT rate. But now that the VAT rate will be restored to 15 percent, many business owners are worried that the effect on their business will be negative.
It seems that the original reduction did in fact have a broadly positive effect, but what will the impact be now as the country is taking tentative steps to rebuild the economy?
And crucially, what does the VAT increase mean for your business? Section 73 of the VAT Act provides that where there is a decrease or increase in tax rate, goods shall be deemed supplied (provided) when they are delivered and in the case of rental agreement (operation lease) when the recipient takes possession/occupation thereof.
The VAT Act defines the general time of supply in terms of five aspects namely the invoice date, payment date, date goods are removed in the case of movable goods, date possession or occupation taken in the case of immovable property and date services are rendered or performed, whichever is the earliest.
The time of supply will be triggered by the delivery or occupation/possession thereof, despite none of the time of supply rules as mentioned in the VAT Act having taken place. Therefore, if delivery of goods or possession/ occupation took place before the date of change in tax rate, the supply will be levied to tax based on the rate before change (old VAT rate).
On the other hand, if delivery or possession occurs after the rate change, the new rate applies, unless any of the time of supply rules as mentioned in the VAT Act have occurred before this date. That is if the payment or invoice has already been issued, the time of supply is defined in terms of such invoice or payment.
Regarding supplies subject to special timing rules, VAT rate may not necessarily be confined to one rate, instead the rate may vary according to the time of supply. In the case of supply of service, operating leases (rental agreements) or construction, manufacturing, repair etc. contracts, if performance began and ended before the rate change, the old rate will be applied.
If, however, performance began before the rate change and ends after the rate change, the supply will be apportioned according to the time performance was done. Part of the supply will be subject to the old rate and the other part based on the new rate.
This has some effects on one’s business revenue in that, generally the balance between input and output tax is a primary consideration when you decide whether to become VAT registered. Input tax is the VAT you pay on goods or services that you buy, while output tax is the VAT you take on goods or services you sell.
The change in the VAT rate may well have an effect on the balance between your input and your output tax. For example, if you chose to increase your prices in line with the new VAT rate, your output tax will be higher than it was before the rate change. However, some of your suppliers may have chosen not to raise their prices and, as a result, your input tax will be lower.
The VAT reduction and the subsequent increase have both been contentious. However, while many retailers benefited from the reduction, all those affected will now have to deal with the consequences of the increase.
The choice of whether to raise your prices or absorb the increase will depend on a number of factors, including the state of your competitors, your existing customers’ loyalty, and the financial necessity of maintaining your sales volumes.
Regardless of your individual situation you must ensure that you properly consider the implications of the VAT increase and look at how the market has performed over the last few months to make sure you make the right decision and are ready to take steps to counter any negative effects. The increase in VAT rate has implications for businesses requiring that proper planning is undertaken to avoid cost of non-compliance and of doing business. Internal engagement and those with stakeholders namely customers, suppliers etc. is required to manage the transition and the VAT liability going forward. Unlike the previous revision downwards, ZIMRA will be more interested in seeing how the transition is being managed.
Meanwhile Matrix Tax School will be hosting a one-day tax seminar on “Tax Developments 2023” on January 18, 2023 where speakers will discuss this and other intriguing tax measures announced in the 2023 National Budget to help businesses manage the transition into 2023.
Tapera is the founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School. He writes in his personal capacity