The general rule is that VAT becomes chargeable at the time when a taxable supply of goods or services is made.1 The basis on which the trader is required to account for VAT is dealt with in accounting for VAT and money received basis.
The general rule is subject to the following qualifications:
-- In dealings with taxable persons, VAT becomes due on the date of issue of the invoice, or on the date on which the invoice should have been issued, if the issue has been delayed.
-- Where payment in whole or in part in respect of a transaction is received before the date on which the VAT would normally be due, VAT is due on the date of receipt of the payment.
The exceptions to this rule are as follows:
-- VAT is normally due on supply of goods on the date of issue of the invoice but at the latest on the 15th day of the month following the month in which the goods arrive.
-- VAT is due in respect of goods imported from foreign countries at the point of entry.
-- VAT is due in respect of services which are taxable where they are received on the date of the issue of the invoice but at the latest on the 15th day of the month following the supply of the service.
Right to deduct VAT - general rule
In computing the amount of VAT payable in respect of a taxable period, an accountable person may deduct the VAT charged on most goods and services which are used for the purposes of his or her taxable supplies. No deduction may be made for the VAT on goods and services used for any other purpose, such as VAT exempt activities.
To be entitled to the deduction the trader must have a proper VAT invoice or relevant Customs receipt.
While a deduction of VAT is allowable only on purchases which are for the purposes of a taxable supplies, a situation may arise where a portion of a trader's purchases may be for the purposes of the taxable supplies and the remaining portion for the trader's private use, for example, electricity, telephone charges or heating expenses where the business is carried on from the trader's private residence. It may also arise that inputs may be used for both taxable and non-taxable activities. In such cases, only the amount of VAT which is appropriate to the taxable supplies is deductible. Similarly, where a person engages in both taxable and exempt supply (dual-use inputs), it is necessary to apportion the credit between the inputs used for taxable and exempt supply.
Businesses engaged in both taxable and exempt activities
A deduction of VAT is allowable on purchases for the purposes of taxable supplies. If a person carries on both taxable and exempt business, only the VAT appropriate to the taxable supplies is deductible. Where dual-use inputs are used, eg, goods/services used for both a taxable and an exempt activity, a proportion of the VAT may be deducted on the basis of a method of apportionment between taxable and exempt supplies. A person engaged in taxable supplies has the right to deduct a proportion of tax deductible which correctly reflects the extent to which the dual-use inputs are used for the purposes of that person's taxable supplies or activities and has due regard to the range of that persons total supplies and activities.
Gifts
With some exceptions, gifts of taxable goods made in the course or furtherance of business are liable to VAT unless their cost to the donor, excluding VAT, is of specified limit or less. Where gifts are taxable, the chargeable amount is their cost to the donor, excluding VAT.
Advertising goods and industrial samples
Advertising goods and industrial samples given free to customers in reasonable quantities, in a form not ordinarily available for sale to the public, are not taxable.
Replacement goods
Replacement goods supplied free of charge in accordance with warranties or guarantees on the original goods are not taxable.
Supply of goods and services in exchange for vouchers, tokens, etc
The sale of gift vouchers or telephone cards etc is liable to tax.
Pre-paid telephone cards
Pre-paid telephone cards are generally regarded as being similar to vouchers for VAT purposes, provided that the consideration paid does not exceed the amount or value stated on them. Such cards may be used not only to access telecommunication services but also to obtain other services as well as goods. The rate of VAT chargeable is that which is attributable to the particular good or service or combination received at the time of redemption of the card. Where the service is being provided is solely a telecommunications one it is taxable at the standard rate at the time of redemption.
Deposits and pre-payments deemed to be supplies
Where a deposit or payment on account or other payment is received by an accountable person before he or she has made or completed a supply of goods or services, a supply is deemed to have taken place at the time of the receipt of the payment to the value of such payment. Tax is chargeable on that deposit or payment.
Non-taxable supplies of goods
Liability to VAT does not arise where there is a change of ownership of goods as security for a loan or debt or where a business is transferred in whole or part from one accountable person to another. Goods supplied free of charge under warranty or guarantee are not liable to VAT but goods given away free of charge in other circumstances are, in general, taxable.
Transfer of a business or part thereof
A totality of the assets or part thereof must constitute an undertaking or part of an undertaking capable of carrying on an independent economic activity. The transfer, in order to qualify for the relief, must be made to another person in circumstances where that other person intends to apply those goods for the purposes of a taxable supply.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi) 1. A taxable supply of goods means the normal transfer of ownership of goods by one person to another and includes the supply of goods liable to VAT at the zero rates. It means:
a. The transfer of ownership of goods by agreement
b. The sale of movable goods on a commission basis by an auctioneer or agent acting in his or her own name but on the instructions of another person c. The handing over of goods under a hire-purchase contract d. The handing over by a person to another person of immovable goods (property) which have been developed.