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Value Added Tax (VAT)

By: Erumebor Rume Wilson

A tax is an amount of money levied on individuals of goods to the manufacturer, the manufacturer pays
a country by the government of that country. It VAT on the goods bought and sells to the
involves monies paid to the govt. for some services wholesaler also with the same VAT rate.
it renders to the people, and also an obligation to be
Taxation plays a vital role in the economy and its
carried out by patriotic citizens or inhabitants of the
effect cannot be underestimated in the economy,
country. A tax is also a major source of Revenue for
since VAT is a type of Tax system used by the
countries around the world as some countries
depend strongly on monies received from tax. Taxes government, it therefore has much importance as
regards growth and development of the economy.
are usually paid by individuals, firms and corporate
Value Added Tax is also fiscal policy tool used by the
institutions and are sometimes imposed not directly
on the individual/final consumer but on goods and government to control certain economic variables
(problems) that persist or have effect on the
services which they purchase.
activities in the economy.
A Value Added Tax is a type of indirect tax that is
Some effects of VAT on the economy
imposed on goods and services which is being
produced or rendered to the consumer. Sometimes On Inflation: Inflation is simply a persistent increase
when the government operates on a budget in the average level of prices and this sometimes
surplus, or wants to increase its revenue in order to occurs as a result of an increase in the VAT. This
finance its budget deficit, it does this by focusing on means that there is a strong relationship between
increasing its source of income which involves tax VAT and inflation. An increase in VAT rate of a
rate as well as many others. The increase in tax rate particular sector of the economy will therefore lead
is borne directly by these firms and institutions that to high prices of the goods produced by the firms in
operate within the country by reducing the profit of this sector and also on related products. Without an
these organizations. Therefore, these firms levy the increase in quantity and quality of these goods or
tax indirectly on the goods/services they services by the producers, there is likely to be
produce/render at a percentage rate (usually issued inflation. On the other hand, VAT is imposed on
by the government) so as to reduce the tax burden these goods so as to reduce the tax burden of the
imposed on them by the government and this firm.
burden is borne by the final consumer that
purchases these goods produced by these firms. To reduce consumption of certain goods: In a
This type of tax is known as value added tax. It is society, there are some goods which are produced
sometimes shared in percentage to different legally but are seen as unhealthy to individuals that
sectors of the economy and equal percentage is consume them. Some of these goods are cigarettes,
borne by the consumer irrespective of their income alcohol, which are said to have adverse effect on
distribution. It is also collected at each stage of the consumers. Government through the use of VAT
production and distribution i.e. if a supplier sells can reduce/discourage consumption of these

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harmful or unhealthy goods as additional prices or a earned, VAT is usually levied on the prices of goods
certain percentage of its normal price will be added and therefore, the goods are sold in uniform prices
to its normal price and some consumers will be irrespective of the consumer’s income. This
deprived of consuming more of these goods. therefore extends the gap between the rich and the
poor in the society and the poor will have to work
To stimulate local productivity: VAT can be said to
all day with increased retiring age resulting to a fall
have more effects in stimulating or inducing
in the standard of living. In some countries, VAT on
productivity of local goods in the economy. A the other hand is charged on luxury goods and
removal/reduction of VAT rate in a sector serves as
goods of necessity are sometimes left out or
an incentive or simply implies that the government
charged with low VAT rate. This therefore brings to
is trying to increase output in that sector. This normal the income distribution.
would also attract investors in other sectors and
thereby production will be increased and also the On balance of payment: A VAT is considered
demand for these goods produced is likely to advantageous to a country’s balance of trade as it
increase since there will be a fall in price of the can be used to increase export by reducing its rate
products. on goods that are to be exported thereby reducing
its price which might lead to an increase in foreign
To control the prices of some goods: Sometimes
demand. On the other hand, VAT rate can be
governments find it necessary to fix prices of certain increased on exports that its demand is said to be
commodities. The price may be fixed to prevent it
inelastic i.e. a change in price does not lead to a
from seeking its own level of interaction of demand
change in quantity demanded. These measures are
and supply. The price may be fixed so as to prevent said to stimulate exports.
it from rising/falling above/below a certain level; this
can be attained through the use of VAT by VAT as highlighted above has great effect on the
increasing its rate thereby increasing its price and growth of the economy. A VAT rate could go a long
also reducing its VAT rate which will also lead to a way to ensure fastened growth of the economy as
fall in its price. well as decelerate the growth rate of the economy.
It is necessary that the government should take into
Income distribution: VAT is sometimes said to have consideration many factors before administering
adverse effect on income distribution. Unlike
VAT rate to any sector of the economy.
income tax- tax is usually charged on income

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