This is a form of sales tax. Value Added Tax (VAT) is a tax not on the total value of the goods being sold, but only on the value added to it by the last seller. The seller therefore is liable to pay a tax not on its gross value but net value. That is, the gross value minus the value of inputs.
The basic difference between VAT and sales Tax is that the tax liability under VAT is split up into stages; but theoretically, the tax liability in the case of VAT and in the case of Sales Tax at the retail level should turn out to be the same. This is because the total retail price is nothing but the value added to the raw materials at different stages of production and sales. The VAT became operational in Nigeria in 1994.
Advantages of Value Added Tax (VAT)
It is easier to assess tax liability of a firm by using the credit method. The returns submitted by firm can easily be verified. In other word, it is administratively convenient.
It is neutral between factor costs, because it taxes all value added. It does not hinder adoption of advanced technology which may be capital intensive.
It avoids compounding of tax liability.
It is neutral with regards to resource allocation. It does not alter resource allocation.
With VAT, lesser tax evasion is attained. This is because the tax is divided into parts and so the incentive to evade tax by any firm is reduced.
Also, it is in the interest of a firm to account for the taxes paid by the earlier firms through which the inputs have come, otherwise this firm pays the tax itself.
It is easier to separate tax from the cost of production because it is levied on value added. As such a country can easily refund the taxes paid on exportable, and so, encourages exports.
A firm is not exempted from its tax liability even if it runs at a loss. This is because the tax (VAT) is not paid on its profits but on the value it added/produced.
VAT can easily be subjected to multiple tax rates which readily accommodate the credit system- which means deducting tax liability of a firm by the amount of taxes paid by the other firms on its purchase.
Disadvantages of Value Added Tax (VAT)
It is a complicated system and requires an honest and efficient government machinery to do the cross-checking and link up various production activities and the resulting tax liability of each firm.
It depends upon the co-operation of the tax payers as each firm calculates its own tax liability.
It requires the maintenance of elaborate and costly accounts which can be uneconomical especially for smaller firms.
Except where the rates are high, VAT may not generate enough revenue for the government.
Value Added Tax in Nigeria
The Federal inland revenue services is the agency of government charged with the duty of collecting company income tax, remittance and VAT and etc on behalf of the federal government of Nigeria.
According to Federal Inland Revenue of Nigeria, (FIRS) VAT is defined as a consumption tax paid when goods are purchased and services rendered.
In Nigeria VAT is charged at 7.5% and companies are expected to file for VAT monthly returns not later than 21st day of the other month.
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