Value Added Tax (Vat)-The notional credit mechanism explained


The main issue the SRC is referring to is the comment by Brijesh Jivan, treasurer of the SCCI, that with the introduction of the Vat on January 1, 2013 there may be a risk that tax may be charged twice on the same goods that were on hand and unsold as at December 31, 2012 (with GST having been paid on goods imported but unsold as at December 31, 2012 and with Vat applying on goods sold from January 1, 2013. 

The SRC explains that the Vat transitional rules the commission has introduced include two mechanisms to eliminate such potential “double” taxation situation.

Scenario 1 – Direct import 
Vat-registered businesses which have goods in stock as at December 31, 2012 that they imported themselves and on which they have paid the 15% GST at time of import are able to claim this 15% GST, in full, as a Vat credit on their February 2013 Vat return and which will be used by them to offset against their Vat liability for January 2013.

Scenario 2 – Goods purchased locally
It is important to note that there was no GST separately charged by the wholesaler in his invoice to the retailer on the domestic sales of goods that were made prior to December 31, 2012, hence there is no GST on the invoices issued by the suppliers (importer/wholesaler) to the retailer. 

However, we appreciate that the invoiced goods do have potentially a GST component in their invoice price (i.e. the GST paid at the point of entry to Customs Division when the goods were imported). The notional credit is designed to neutralise this GST.

Vat-registered businesses that have bought their goods from importers/wholesalers and have inventoried those goods in their ending stock as at December 31, 2012 can claim a notional credit of 10% on the stock value based on the invoice issue by their supplier. This notional credit will be considered as an input tax credit and offset against the Vat collected (output tax) from the sales made in January 2013. This deduction will be made on their first Vat return for January 2013 (due on February 21, 2013) for compulsory registered taxpayers.  

Why has the notional credit been set at 10% of the amount invoiced to the Vat-registered business by its local supplier?

The value of the goods in stock corresponds to the selling price applied by the supplier (reflected on its invoice). In this selling price there are two components:
• First component: the GST at 15% certainly paid at customs by the supplier on the items when they were imported   
• Second component the mark-up applied by the wholesaler for determining its selling price.

The notional credit is exactly the result of an operation consisting:
(1) First to extract the mark-up (profit margin) applied by the wholesaler for determining its selling price. From discussions with traders the conclusion that in average a 30% mark up ratio was applied has been reached; it is important to note that different wholesalers may apply different mark-up on different products; and

(2) Second to extract the GST itself from the selling price.
As a result the GST corresponds to 10% of the cost value.
The value of the goods in stock as at 31/12/2012 is SR100,000 and the mark-up of the wholesaler was 30%.

The SR 100,000 is made up of:
• 30% mark-up = SR23,076.92 (100,000 x 30/130)
Selling price without mark-up   = 76,923.07 (100,000 – 23,076.92) 
• 15% GST = SR10,033.44 (15/115 x 76,923.07)
Selling price with GST and no mark-up = 66,889.63 (76,923.07 – 10,033.44)
10,033.44 / 100,000 = 10.03%
After having carried out this exercise for different mark-up it was decided that the 10% notional credit substantially covers the 15% GST component of the goods in stock.
Vat-registered retailers need to deduct the 15% Vat credit on all direct imports and/or 10% notional credit on locally purchased imported goods from the cost of their goods in stock as at December 31, 2012 and apply the 15% Vat on that new cost of the stock.
In both scenarios Vat-registered business needs to ensure that:
• The goods are to be used for its business purposes
• The goods are to be used for making taxable supplies
• The goods are not exempt from GST
• Adequate business records have been kept to verify the claim for the credit.
The Seychelles Revenue Commission hopes that this explanation now clarifies the situation regarding a business’s ability to claim a Vat input credit for stock on hand as at December 31, 2012 to eliminate a “double” tax situation arising.

Contributed by the Seychelles Revenue Commission