adminDID you know that the Value Added Tax Act (Chapter 23:12),(VAT Act) prescribes the order in which the VAT debt should be settled in cases where the liability involves the principal, penalty, interest and additional tax amounts?
How does a VAT debt arise?
A VAT debt may arise owing to failure by the client to pay the full amount on time as prescribed in the VAT Act. Any amount of VAT being the principal, additional tax, penalty or interest constitutes a debt due to the State and is recoverable by the Commissioner General. The VAT Act, however, prescribes the order in which the debt components should be settled.
What are the relevant legal provisions?
VAT Principal liability arises in terms of Section 6 of the VAT Act.
Additional tax is chargeable in terms of the provisions of Section 66 of the VAT Act
Interest and penalty arise in terms of Section 39 of the same Act.
Section 40 (7) of the VAT Act sets out the order of settlement of the VAT liability where payments made by a registered operator do not cover the total amount due.
Under such situations, the part payment is allocable as follows;
Firstly applied to the penalty amount
If the penalty is settled, the balance is applied to the interest component of the debt
If the interest amount is fully paid, the balance will be applied to the principal and additional tax amounts
Any balance (unsettled debt) of the principal amount and additional tax will continue to attract interest.
Example
Say Client XYZ has a VAT liability as shown below:
Scenario 1
If the client pays $6,000.00 towards this liability, the amount will be assigned first to penalty and the balance towards interest. Interest will continue to accrue on the principal amount as it remains unpaid. See table below
Scenario 2
If Client XYZ pays $10,000.00, then the amount will be utilized first towards penalty, and then interest, followed by principal and additional tax. Any part of the principal amount which remains outstanding will also continue to accrue interest. See table below
Interest will continue to accrue on the outstanding principal amount.
Reminder
Our valued clients are hereby informed that the P.A.Y.E for the month of July 2014 is due on the 10th of August 2014.
Disclaimer
This article was compiled by the Zimbabwe Revenue Authority for information purposes only. ZIMRA shall not accept responsibility for loss or damage arising from use of material in this article and no liability will attach to the Zimbabwe Revenue Authority.
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