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The government reduced the VAT rate from 15% to 14.5% with effect from 1 January 2020. Whilst this is a welcome move to the tax paying community, it inherently triggers transitional issues crossing over to the new rate. Accounting systems must be configured in order to accommodate the new order. The fact that VAT rate change has not been experienced in the recent times means that some taxpayers may experience challenges crossing over to the new rate. The aim of this article, is to provide a brief overview of some of the challenges that may be encountered by VAT registered operators as a result of this change as fully explained below.
A bit of some background, VAT liability is triggered in Zimbabwe by either the general or specific rules of time of supply, collectively known as the “ordinary rules of time of supply”. The general rule of time of supply dictates that VAT liability is triggered on the date an invoice is issued by the supplier, the payment is received for supply, of delivery of goods, of taking possession of immoveable goods and of performance of services, whichever occurs first. Specific rules of time of supply are applicable to specific transactions among them lease agreements, construction contracts, instalment credit agreements, lay-bye sales etc. They vary the general rule of time of supply to accommodate other trigger points such as the date the payment for the supply becomes due, date the agreement is terminated etc. The third category of time of supply rules applies for purposes of dealing with transitional issues whenever there is an increase or decrease in VAT rate. This is the subject of discussion in this article following VAT reduction from 15% to 14.5% with effect from 1 January 2020.
According to the transitional rules, goods are deemed supplied (provided) when they are delivered and in the case of rental agreement (operation lease) when the recipient takes possession/ occupation thereof. This means that VAT liability may be triggered by the delivery or occupation/possession thereof, despite none of the ordinary time of supply rules has taken place. Therefore if delivery of goods or possession/ occupation took place before 1 January 2020, then the old VAT rate of 15% will be applied. On the other hand, if delivery or possession took place after 1 January 2020, new rate applies, unless the ordinary rules of time of supply occurred before this date.
Furthermore, with regards to specified items VAT rate may not necessarily be confined to one rate, instead the rate may vary according to the time of supply. With regards to specified items such as service, operating leases (rental agreements) or construction, manufacturing, repair etc contracts, if performance began and ended before 31 December 2019, the old rate of 15% will be applied. If, however, performance began in 2019 and ended or ends in 2020, 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. The Act has not stated how apportionment shall be done except to say that the basis of apportionment should be fair and reasonable.
The two rates will also be required to be kept for some time in order to deal with reversing transactions e.g credit or debits notes issued after 1 January 2020 for supplies made at 15%, settlement and volume discounts, bad debts written off and recovered etc.
With regard to input tax claim, a registered operator is entitled to deduct input tax equal to the tax charged to him on goods or services acquired for purposes of its trade that makes taxable supplies. The transitional rules do not change this principle: the rate at which the operator claims input tax will therefore depend on the rate at which its suppliers levied VAT on the supplies. However, invoices issued at the incorrect rate and subsequently corrected by suppliers may pose a challenge to operators who claimed input tax in respect of such invoices. It is therefore possible that the ZIMRA may reject some of the claims if no sufficient documentation is available.
Besides the legislative implications outlined above there are other transitional issues brought about as a result of the decrease in VAT rate. Particularly, entities need time to update their systems and procedures to properly implement the VAT rate change. There is need to train relevant personnel handling tax issues and properly configure systems that cater for both the old and new rates in order to ensure a smooth transition. Thus, the change in VAT rate will have a major administrative impact such as changes to accounting systems, including considering new tax codes, changes to tax invoices, debit and credit notes, changes to product labelling and price lists etc.
In conclusion taxpayers should watch transactions such as operating lease, contracts providing for periodic payments, construction, manufacturing, repair etc contracts these are affected by transitional rules which may entail application of the old rate or of both rates. Therefore even after 1 January 2020, the old rate of 15% may still be applicable. In addition they should review all existing contracts that provide for ongoing or periodic supplies of goods and/or services for the implications of the VAT rate change