I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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1.3 Input and output sales tax 

Registered businesses charge output sales tax on sales and suffer input sales tax on purchases. If 

output sales tax exceeds input sales tax, the business pays the difference in tax to the authorities. If 

output sales tax is less than input sales tax in a period, the tax authorities will refund the difference to 

the business. 

 

Sales tax charged (or 'collected') on goods and services sold by a business is referred to as 

output sales 

tax

. Sales tax paid (or 'suffered') on goods and services bought by a business is referred to as 

input 

sales tax

. 

 

(It may be easier to think of output sales tax as sales tax paid by others on goods and services going 'out' 

of a business and input sales tax as sales tax paid on goods and services going 'in' to a business.) 

The example above assumes that the supplier, manufacturer, wholesaler and retailer are all sales tax 

registered traders. In order to charge sales tax, a business must be registered for sales tax.  

A sales tax registered trader must carry out the following tasks. 

(a) 

Charge sales tax on the goods and services sold at the rate prescribed by the Government. This is 

output sales tax. 

(b) 

Pay sales tax on goods and services purchased from other businesses. This is input sales tax. 

(c) 

Pay to the tax authorities the difference between the sales tax collected on sales and the sales tax 

paid to suppliers for purchases. Payments are made at prescribed intervals. 

1.4 Irrecoverable sales tax 

Some sales tax is irrecoverable. Where sales tax is irrecoverable it must be regarded as part of the cost 

of the items purchased and included in the statement of profit or loss charge or in the statement of 

financial position as appropriate. 

There are some circumstances in which sales tax paid on inputs cannot be reclaimed (eg where a trader 

is not registered for sales tax or where inputs are not related to taxable business activities). This is 

referred to as irrecoverable sales tax. In these cases the trader must bear the cost of the sales tax and 

account for it accordingly. 

For example, if a business pays $500 for entertaining expenses and suffers irrecoverable input sales tax 

of $75 on this amount, the total of $575 paid should be charged to the statement of profit or loss as an 

expense. Similarly, if a business pays $5,000 for a motor vehicle and suffers irrecoverable input sales 

tax of $400, the business should capitalise the full amount of $5,400 as a non-current asset in the 

statement of financial position.  

1.5 Amounts inclusive and exclusive of tax  

In business, you are likely to come across sales and purchases figures quoted as gross or net of 

sales tax.  

The gross amount of a sale or purchase is the amount inclusive of sales tax.  

The net amount of a sale or purchase is the amount exclusive of sales tax.  

For example, if the net amount of a purchase is $100, and the rate of sales tax is 15%, the amounts are 

as follows. 

Net amount exclusive of sales tax: 

 

= $100 

Sales tax: 

= $100  15% 

= $15  

Gross amount inclusive of sales tax: 

= $100 + $15 

= $115 

It is a bit more difficult to calculate the net amount, or sales tax, from the gross amount and the rate of 

tax. The net amount is equal to the gross amount / (1 + tax rate). 

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