Definition and scope of value added tax economics essay

This study used consumption cost, Gross Domestic Product, Household cost and international trade values collected from the Central Bank of Nigeria Statistical Bulletin from The results revealed that while consumption tax is a significant determinant of VAT revenue, GDP, Household cost and international trade are not significant determinants of VAT revenue. In view of our finding and in line with reality, government should intensify efforts to effectively exploit VAT as a source of revenue.

Definition and scope of value added tax economics essay

Recognizing the experiment as successful, the French introduced it in Wilhelm von Siemens proposed the concept in Initially directed at large businesses, it was extended over time to include all business sectors. As its name suggests, value-added tax is designed to tax only the value added by a business on top of the services and goods it can purchase from the market.

To understand what this means, consider a production process e. When an end-consumer makes a purchase, they are not only paying for the VAT for the product at hand e. The value-added effect is achieved by prohibiting end-consumers from recovering VAT on purchases, but permitting businesses to do so.

The difference is the tax due to the value added by the business. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction.

Comparison of cash method and accrual method of accounting The standard way to implement a value-added tax involves assuming a business owes some fraction on the price of the product minus all taxes previously paid on the good.

By the method of collection, VAT can be accounts-based or invoice-based. Buyers who are subject to VAT on their own sales output tax consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government or a refund is claimed, in the case of negative liability.

Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method.

By the timing of collection, [8] VAT as well as accounting in general can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds—no matter when the sale had been made.

Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque date—regardless of when the expense had been incurred.

Definition and scope of value added tax economics essay

The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid.

Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred.

While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables amounts due from customers on credit sales and payables amounts due to vendors on credit purchases.

The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports. VAT registered businesses can be natural persons or legal entities, but countries may have different thresholds or regulations specifying at which turnover levels registration becomes compulsory.

VAT-registered businesses are required to add VAT on goods and services that they supply to others with some exceptions, which vary by country and account for the VAT to the taxing authority, after deducting the VAT that they paid on the goods and services they acquired from other VAT-registered businesses.

Comparison with sales tax[ edit ] This section does not cite any sources.The Value Added Tax - Introduction The Value Added Tax(VAT) is a kind of consumption tax which mainly imposed on the value added to a product, material or service.

The first country to have a value added tax is France in The chapter will also review provisions made in sections of the Value Added tax Act, (Act ) concerning VAT administration. DEFINITION AND SCOPE OF VALUE ADDED TAX.

Value Added Tax (VAT) is defined as “a tax applied on the value added to goods and services at each stage in the production and distribution chain”. Economics: Economics, social science that seeks to analyze and describe the production, distribution, and consumption of wealth.

Economics was formerly a hobby of gentlemen of leisure, but today there is hardly a government, international agency, or large commercial bank that . Value-added taxes around the world commonly exempt or tax at a reduced rate food and other necessities.

3 The same practice is observed for the sales taxes imposed by . led the economic means and the po - litical means of attaining wealth, that is, between “work and robbery.” “The state,” he concluded, “is an or-ganization of the political means.” The economic means must pre-cede the political means.

However, not all kinds of work produce sur-pluses sufficient for sustaining a state. A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in .

Value-added tax - Wikipedia