N6 – Module 5


3. Consumption tax Consumption takes place when citizens of a country spend money on goods – they consume, either by eating what they buy or by taking the goods home and using them. Te most common types of consumption tax are: value-added tax (VAT), general sales tax (GST – no longer used in SA), import duty, and excise duty.


Value-Added Tax Different types of sales tax exist – VAT is a sales tax levied on each successive stage of trading. Tis tax is imposed on supplies of goods and services – this supply must be of goods and services made/ rendered by a vendor in the process of conducting the business. A vendor is thus any business organisation which supplies goods and services to an end user – the business organisation must register as a vendor if the value of taxable goods or services exceeds R150 000, within a 12 month period.


Any purchaser of goods and services (the subject) is expected to pay VAT to the supplier. Suppliers then pay the difference between what they paid and what they received from the last purchase, to the government. Because the suppliers of goods and services pay only this difference, they cannot be seen as the subject of taxation – the end user then becomes the subject of taxation.


Certain goods may be zero rated – this means that no VAT is charged – in SA certain foodstuffs are zero-rated. See the table below as an explanation of how VAT works:


Supplier


AB C Purchaser


Factory Wholesaler Wholesaler Retailer Retailer


End User


R1 140.00 R1 700.00 R2 249.99


D


Cost of Goods charged by A


VAT paid by B


R140.00 R238.00 R314.99


Te wholesaler who has bought goods for R1 140.00 from the factory, will sells those same goods for R1 462.00 plus VAT of R238.00. He will subtract what he has paid from what he has been charged: R238 – R140 = R98. Tis amount of R98 will be paid over to the government. Tis means that:


VAT paid to the SARS = VAT charged – VAT paid See if you can calculate what the retailer pays over to the government.


Import duty Duty on imports may serve two important functions: not only is this a source of revenue, but the government may use this type of tax to discourage importation of goods, and also to stop “dumping” (see below for explanation). Every country should aim to export more goods in currency value than they import. Governments sometimes need to discourage imports in order to adjust the balance of payments – import duty may be used for this purpose. “Dumping” is a situation when an industry within a country is subsidised – this means the industry (say textile, for example) is able to export its products for less than another country is able to manufacture them. Te local industry of the recipient country suffers, as there could be job losses when factories close down, etc. – this is levied as an ad valorem tax (according to value).


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