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It’s easy to see why one would get confused when it comes to Tax and VAT. Questions like whether you are liable to pay it or whether you find yourself and your business under the threshold of a taxable business income, are just some of the most common questions that South African Entrepreneurs have.
The truth is that Tax and VAT can be both complicated and confusing, which is why most businesses (small or large), prefer to make use of Tax practitioners. If, however you find yourself in a position where this is not a viable (or affordable) option, let’s consider this short overview of the main differences, frequently asked questions, and their answers.
What is Corporate Income tax?
Corporate Income Tax, or otherwise known as Business Tax, is a tax imposed on South African businesses that earn their revenue within South-Africa. The Tax is calculated at 28% of the business’ income, excluding expenses and is considered a governmental income.
While there are some businesses that are exempt from paying CIT (Corporate Income Tax), the greater part of South African businesses is required to comply with the legality, including, but not limited to:
- Listed public companies
- Unlisted public companies
- Private Companies
- Close Corporations
- Collective Investment Schemes
- Small Business Corporation (s12E)
- Bodies Corporate
- Share Block Companies
- Dormant Companies
- Public Benefit Companies.
If you fall in the category of any one of these companies, be assured that you are in fact deemed eligible to pay Corporate Tax.
And what about VAT you ask? Let’s consider the differences between the two first.
What are the differences between Tax and VAT?
Sales tax is an amount paid by the end user in a purchase line. An example of sales tax would be the tax paid by the home renovator, when buying the tiles that are used for the kitchen or bathroom. This amount is paid at the end of the production line.
VAT or Value Added Tax on the other hand is the collective accumulation of tax throughout the entire life span of a product’s production, to its distribution as well as the final sale. VAT is paid in each stage of distribution of a product – and this would include suppliers, manufacturers, distributors, retailers, and end users of the product/service. Businesses are required to record and document the VAT on their purchases in order to receive a credit for the VAT paid on their tax return, and provided that they meet the right criteria.
Directing back to Corporate Income Tax, it can be said that CIT is the final payment of tax to government as an end user and is considered payment for the usage of infrastructure, governmental services or any other governmentally owned products or property. This is how a government ensures its sustainability.
Why am I paying Corporate Income Tax?
Businesses are required to pay Corporate Tax on their NET Profit, generated by trading profits, chargeable gains, investments, selling assets for more than what they were purchased, as well as company assets which include land and property, equipment, and machinery and finally, company shares. In a nutshell, if you own a business, you’re likely to be legally required to pay Tax on Net income generated over the course of your financial year.
This income model enriches the lives of South-Africans and upholds a healthy, stable community. It creates employment, wards off economic disaster and builds a better future for South-Africans.
What is the Tax submissions process?
First and foremost, your company needs to be Tax Registered. You can do this yourself or have a helping hand like Company Partners show you the way and finalise registrations, submissions, or amendments on your behalf.
All South African Companies, irrespective of whether they are trading or not or running at a loss, are required by law to file annual and provisional tax submissions with SARS. Should a company be dormant, and no income received in a financial year, a zero-rand submission must be filed as a declaration to SARS that the company is dormant.
Further to this a Provisional Tax Return (IRP6) is also on the cards.
Companies are to submit a provisional tax return (IRP6) for the first six months from the start of the financial year, and a second Provisional submission (IRP6) should be done at financial year end. It must contain an estimate of the total taxable income earned, or provisionally earned, for that period. The tax return must accompany a payment of the estimated value. The balance due by the end of the second half of your tax year, can be paid once the final Annual Tax Return (ITR14) is submitted.
In order to grow your business, a solid service or product provision is required, and no prospective contract does this better than a Tender for ongoing services. But, before you are illegible to apply for Tenders, a Tax Clearance Certificate is needed. Not only is this imperative for the application of tenders, but it also allows your company to list as a Service Provider for large companies and corporations or governmental institutes.
SARS regulations submission deadlines
As with all legal and financial matters, deadlines are of the essence and SARS too enforces a Tax deadline on Tax Return submissions and payments.
The first payment of your tax return is due within six months of the beginning of the year of assessment. Your second payment is due on or before the last day of the year of assessment and the third payment is due seven months after the year of assessment for taxpayers who have a February financial year-end. All other financial year-end cases have six months after the year of assessment, to make their final payments.
SARS regulations on Late submissions
It comes as no surprize that late tax submissions carry hefty fines from SARS. A non-compliance penalty for failure of submitting a SARS Tax Return can run anywhere from R250.00 to R16 000.00 per month, for each month that no submission is filed, and this can accumulate for as long as 35 months. The math thereof is astonishing, assuming your penalty is R16 000.00 per month. Added to this, the Corporate Income Tax payment is also due, which depicts a clear idea of just how expensive non-compliance can become.
The message is clear, substantial measures have been put in place to ensure that all businesses, from small to corporate, are held responsible for the registration and submission of their Tax Returns. While the nitty-gritty thereof can be quite the headache, many guidance and supporting platforms have been set up to aid small businesses, and if all else fails, affordable assistance is but a phone call away, to help keep you compliant, your business healthy and your future secure.
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