This is tax levied or charged on the sales value. The simple meaning is TAX ON SALES. Sales tax is an example of indirect tax. Consumers pay for this tax indirectly when they purchase taxable products. Sales tax is not a tax [aid on profits but on sales (also known as turnover or supplies).
Any trader or entity that will demand sales tax from customers must have been registered for this purpose. Sales tax will be demanded from customers who are registered for sales tax and non registered customers. Non registered traders or entities are not allowed to demand this from their customers.
These registered traders or entities serve as free Agents to the government. This means that, they collect this tax on behalf of Government without any consideration from the Government. The net amount (after deducting sales tax paid on purchase) will be remitted to the government through the tax Authorities. This means that a registered trader or entity will remit the difference between output tax and input tax to the government or make a claim from the government if the input tax exceeds the output tax.
INPUT TAX – this is tax paid on purchases of goods or assets
OUTPUT TAX – this is tax charged or levied on sales.
Both the input tax and output tax are not types of sales tax. This classification is just to enable us to identify two activities that normally take place between the party that charges tax and the party that pays tax. it is either you buy or sell. If you are the buyer, you will pay sales tax on what you purchased from a registered trader; so to you it is input tax. if you are the seller, you must include sales tax in the sales value of goods sold to all customers (whether registered or not registered); so to you, it is output tax. What is input tax to A – the buyer, is the output tax to B – the seller. Hope you understand this.
For the purpose of sales tax, sales can be divided into three parts :
 Exempt sales
 Zero-rated sales
 Standard rated sales
A registered trader or entity is not permitted to charge sales tax on Exempt and Zero-rated products. This means that, the sales values of exempt products and zero-rated products must not include sales tax. However, the recovery of input tax is not treated the same way for a trader selling exempt products and for a trader selling zero-rated products. A trader who sells zero-rated products will be receive all input tax (or sales tax) paid on purchases from the government while the trader who sells exempt products will not be allowed to claim the input tax (or sales tax) paid on purchase from the government, this means no refund from the government. To this trader, input tax is not recoverable. The only thing the trader or entity can do is to include the input tax paid on purchases in the total purchase cost so as to transfer this to its customers.
A registered trader or entity who sells standard rated products is permitted to deduct input tax(on purchases) from output tax(on sales) and the balance will be remitted to or claimed from the government.
This is the implication of my discussion above –
If zero-rated and exempt products are sold on credit, the receivables balance that will appear in the statement of financial position will be EXCLUSIVE OF SALES TAX. WHY? These products are to be sold without requesting the customers to pay sales tax. If standard rated products are sold, receivables balance that will appear in the statement of financial position will BE INCLUSIVE OF SALES TAX.
It is very important for you to know the type of the product sold by the registered trader or entity. This lecture note will focus on standard rated sales. Sales tax may have a flat rate of 15%, 17.5%or 20%. You need to know the rate given to you by the examiner.
ACCOUNTING TREATMENT FOR STANDARD RATED SALES
CASH SALES –
DR (INCREASE) CASH ACCOUNT (with the total sales value inclusive of sales tax)
CR (INCREASE) SALES ACCOUNT (with the actual sales value)
CR (INCREASE) SALES TAX CONTROL ACCOUNT (with the amount of sales tax).
CREDIT SALES –
DR (INCREASE) RECEIVABLES ACCOUNT (with the total sales value including sales tax)
CR (INCREASE) SALES ACCOUNT (with the actual sales value)
CR (INCREASE) SALES TAX CONTROL ACCOUNT (with the amount of sales tax).
NOTE –
It is important for all students to know whether the sales value is inclusive of sales tax or net of tax. For instance, if you are given sales value that is inclusive of sales tax, you need to identify the flat rate........................