Choose this button to head back to Anowa's homeThe Value-Added Tax (known as ), is imposed by the government at each stage in the production of a good or service. The tax is paid by every company that handles the product during its transformation from raw materials to finished goods. The amount of the tax is determined by the amount of the value that a company adds to the materials and services it buys from other firms.
For instance, if a company making orange squash buys oranges, sugar and preservatives worth ¢1,000,000. Then it spends an additional ¢100,000 on manpower, rent, telephone calls and delivery costs. It sells the orange squash for ¢1,600,000. The company would pay a value-added tax on ¢500,000. This figure is arrived at by subtracting the cost of the materials (¢1,000,000) and operating expenses(¢100,000) from the sale price(¢1,600,000). Thus, ¢1600,000 - (¢1,000,000 + ¢100,000) = ¢500,000.
Most firms that pay a VAT tax try to pass this expense on to the next buyer. As a result, most of the burden of this tax eventually falls on the consumer. The tax is levied at a fixed percentage rate and applies to all goods and services.
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