VAT Calculation in Zambia

Every country in the world needs revenue to provide health, education, social services, roads, and a wide range of other facilities for all its citizens. One of the ways Government mobilizes revenue is through taxation and one such tax is a consumption tax called Value Added Tax (VAT).VAT is an indirect tax which was introduced in Zambia on 1st July 1995 to replace sales tax.

The advantages of VAT

for businesses can be summarized as follows: VAT is largely invoice based and therefore uniform and uncomplicated, offering a sound financial management system with less collection weaknesses. As a result of increased tax compliance, brought about by the ‘self-policing’ nature of VAT, there is less distortion of trade.
VAT gives the potential for a stronger home manufacturing industry and more competitive export prices.The input credit mechanism gives registered businesses back much of the tax they pay on purchases and expenses used for making taxable supplies.

General Sales

It is a fairer tax than most General Sales Tax largely because it avoids the ‘tax on tax’ characteristic of most indirect taxes. A wider tax base has resulted in less distortion of trade and a greater sharing, across all sectors of the business community, of the costs of collecting indirect taxes and remitting them to the Government.

Zambia Revenue Authority (ZRA)

VAT in Zambia is administered under the Domestic Taxes Division of Zambia Revenue Authority (ZRA). The primary Law relating to VAT is contained in the Value Added Tax Act Chapter 331 of the Laws of Zambia. The subsidiary legislation comprises General Regulations made by the Minister through Statutory Instruments and Adminis

VAT Computation Examples

The following example shows how VAT works through the chain from Manufacturer to retailer. A manufacturer makes copper trays which are sold through a wholesaler to a retail supermarket and then on to the consumer.
The VAT rate is 16%: The Manufacturer sells the copper tray to the Wholesaler for K2, 900.00 VAT inclusive, being K2, 500 for the item and K400.00 VAT. He uses his own labour both to mine the copper and make the tray so he makes no purchases. The tax position of the manufacturer in other countries can be calculated as follows:

VAT inclusive total sales value

i.e. K160.00 from the supermarket on a value added amount of K1, 000; K240.00 from the wholesaler on a value added amount of K1, 500; and K400.00 from the manufacturer on a value added amount of K2,500.00. This example illustrates that although VAT is collected in stages, by a VAT registered business, it is a tax on consumer expenditure.
The final consumer has paid the full tax of K800.00 in the retail price. VAT is collected in the chain that begins with the manufacturer or importer and goes through the distribution and retail stages to the final consumer.

Supplies for VAT Purposes

VAT is a tax charged on taxable supplies of goods and services. The example above shows VAT being charged and collected on a chain of supplies on the sale of a tray. However there are many business transactions in addition to a straight sale, which are also viewed as supplies under VAT Law, e.g Pay as you earn.