Value Added Tax (VAT)

A value added tax is a tax, imposed at every stage of production, on firms’ value added.  The value added of the company is the difference between the company’s purchases of the inputs from the other companies. It is a company’s value added is just the amount of value the company contributes to the service or goods by using its factors of productions (labor, land, entrepreneurial ability and capital). Another system of computing a company’s valued added is to total the company’s payments to the company’s factors of production.

Types of Value Added Tax

There are generally three kinds of value added tax’s that varies in their tax treatment of purchases of the capital inputs (equipment and plant). Under the utilization or consumption value added tax, the capital purchases are treated the similar way as the purchase of any other input i.e. the purchase value is subtracted during the time of buy.  This type of tax treatment of capital purchases is equal to the expensing. In the income, the value added tax paid on the purchases of the capital inputs is amortized (credited against the company’s value added tax liability) over the estimated lives of the capital inputs. In the gross product the value added tax there is no deduction or subtraction for the value added tax on the purchases of the capital inputs is enabled against the company’s VAT liability.

All twenty two OCED countries with value added tax’s utilizes the consumption kind of VAT. The consumption value added tax is the kind generally advocated for this nation. In fact, most of the value added tax advocates aim to shift the tax burdens from the capital income to the consumption. In addition, a consumption value added tax is simpler to calculate since the companies don have to separate the expenditures for the capital from other expenses. There are usually three methods are utilized for computing the value added tax such as the subtraction method, the addition method and credit method.

Questionnaire:

• What is VAT?
• What are the types of Value Added TAX and explain them?