Value Added Tax (VAT)

Value-Added Tax (VAT) is a tax on consumer spending. It is collected by VAT-registered traders on their supplies of goods and services effected within the State, for consideration, to their customers. Generally, each such trader in the chain of supply from manufacturer through to retailer charges VAT on his or her sales and is entitled to deduct from this amount the VAT paid on his or her purchases.

The effect of offsetting VAT on purchases against VAT on sales is to impose the tax on the added value at each stage of production – hence Value-Added Tax. For the final consumer, not being VAT-registered, VAT simply forms part of the purchase price.

ADVANTAGES:

  • As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax evasion due to its catch-up effect.
  • VAT is simple to administer as compared to other indirect tax.
  • VAT is transparent and has minimum burden to consumers as it is collected in small fragments at various stages of production and distribution.
  • VAT is based on value added not on total price. So, price does not increases as a result of VAT.
  • There is mass participation of taxpayers.

DISADVANTAGES

  • VAT is costly to implement as it is based on full billing system.
  • VAT is relatively complex to understand. The calculation of value added in every stage is not an easy task.
  • To implement the VAT successfully, customers, need to be conscious, otherwise tax evasion will   be widespread.

 

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