What Is the Difference Between VAT and Income Tax?
A practical South African guide to VAT vs income tax, who pays VAT, and how VAT works inside a business.
6 min read
Key Takeaways
- VAT and income tax are different taxes with different purposes.
- VAT is charged on taxable goods and services, while income tax applies to profits or income earned.
- Businesses often collect VAT from customers, but income tax is paid on the business's taxable profit.
- A VAT-registered business does not keep the VAT it collects as revenue.
- Understanding VAT vs income tax helps business owners price correctly, manage cash flow, and stay compliant.
VAT vs Company Tax
1. VAT is a transaction tax
Value-Added Tax is linked to the sale of taxable goods or services. It is charged as part of a transaction and is collected by a VAT-registered vendor on behalf of SARS.
2. Income tax is a profit or earnings tax
Income tax applies to income earned. In the case of a company, this generally means tax on the company's taxable profit after allowable deductions and adjustments.
3. VAT is not the same as company tax
A business can collect VAT from customers and still separately owe income tax on its profits. These are not substitutes for one another and they are accounted for differently.
4. VAT affects pricing and cash flow
Because VAT is added to certain sales and reclaimed on qualifying business purchases, it affects invoicing, bookkeeping, and cash flow timing. Income tax is usually considered after business performance is measured over a period.
5. Both taxes matter in business decisions
Business owners need to understand both taxes because pricing, margins, profitability, and compliance can all be affected if VAT and income tax are confused.
How VAT Works in Business
- A VAT-registered business charges VAT on taxable sales it makes to customers.
- That VAT is output VAT and is generally payable to SARS, subject to the vendor's VAT calculation.
- The business may also incur VAT on qualifying purchases and expenses, often called input VAT.
- The VAT return generally compares output VAT collected with allowable input VAT paid.
- If output VAT is higher than input VAT, the business may owe SARS the difference.
- If allowable input VAT exceeds output VAT, the business may be in a refund position depending on the return.
- VAT collected from customers is not business profit and should not be treated as income.
- Income tax is assessed separately based on the business's taxable income or profit.
Frequently Asked Questions
What is the difference between VAT and tax in South Africa?
VAT is one type of tax. It applies to taxable goods and services, while income tax applies to income or profits earned by individuals and businesses.
Who actually pays VAT?
In practice, the end customer usually bears the VAT cost in the purchase price, while the VAT-registered business collects and pays it over to SARS.
Does a business keep the VAT it charges?
No. VAT collected is generally not the business's money to keep as profit. It is collected on behalf of SARS, subject to allowable input VAT deductions.
Is company tax the same as VAT?
No. Company tax applies to taxable profit, while VAT applies to taxable sales and purchases within the VAT system.
Can a business pay income tax even if it is not VAT registered?
Yes. Income tax and VAT are separate obligations. A business may owe income tax even if it is not registered for VAT.
Need Help With VAT or Business Tax Compliance?
If you need help with VAT registration, bookkeeping, or understanding your compliance obligations, our team can assist.