Value added tax (VAT) is known as the most recent and effective innovation in the taxation field. It is levied on the value added of the goods and services. Theoretically, the tax is broad based as it covers the value added to each commodity by a firm during all stages of production and distribution.
Value added tax (VAT) is considered as one form of sales taxation. VAT is a multiple stage tax which has grown as a hybrid of turnover tax and retail level sales tax. Value added tax (VAT), however, differs from turnover tax as the turn over tax is imposed on the total value at each while VAT is imposed only on value added at that stage. VAT varies from sales tax in the sense that VAT is imposed at each stage of production and distribution whereas retail sales tax is imposed only at one stage, the final stage. VAT helps to minimize many problems related with tax evasion. Therefore, value added tax (VAT) is more productive and less destructive than retail sales tax.
Computation of VAT at different stages of distribution channel (VAT rate 10%)
Stage...................Sales........Purchase price.......Net added value..........VAT
Farmer...............$ 500.......Nil...............................500..........................50-0 = 50
Manufacturer.......700.......500.............................200..........................70-50=20
Wholesaler............800.......700.............................100..........................80-70=10
Retailer..................1000....800.............................200........................100-80=20
Final.......................-----.....1000..........................1000.................200-100=100
