Value Added Tax (VAT) By: Erumebor Rume Wilson A tax is an amount of money levied on individuals of a country by the government of that country. It involves monies paid to the govt. for some services it renders to the people, and also an obligation to be carried out by patriotic citizens or inhabitants of the country. A tax is also a major source of Revenue for countries around the world as some countries depend strongly on monies received from tax. Taxes are usually paid by individuals, firms and corporate institutions and are sometimes imposed not directly on the individual/final consumer but on goods and services which they purchase. A Value Added Tax is a type of indirect tax that is imposed on goods and services which is being produced or rendered to the consumer. Sometimes when the government operates on a budget surplus, or wants to increase its revenue in order to finance its budget deficit, it does this by focusing on increasing its source of income which involves tax rate as well as many others. The increase in tax rate is borne directly by these firms and institutions that operate within the country by reducing the profit of these organizations. Therefore, these firms levy the tax indirectly on the goods/services they produce/render at a percentage rate (usually issued by the government) so as to reduce the tax burden imposed on them by the government and this burden is borne by the final consumer that purchases these goods produced by these firms. This type of tax is known as value added tax. It is sometimes shared in percentage to different sectors of the economy and equal percentage is borne by the consumer irrespective of their income distribution. It is also collected at each stage of production and distribution i.e. if a supplier sells goods to the manufacturer, the manufacturer pays VAT on the goods bought and sells to the wholesaler also with the same VAT rate. Taxation plays a vital role in the economy and its effect cannot be underestimated in the economy, since VAT is a type of Tax system used by the government, it therefore has much importance as regards growth and development of the economy. Value Added Tax is also fiscal policy tool used by the government to control certain economic variables (problems) that persist or have effect on the activities in the economy. Some effects of VAT on the economy On Inflation: Inflation is simply a persistent increase in the average level of prices and this sometimes occurs as a result of an increase in the VAT. This means that there is a strong relationship between VAT and inflation. An increase in VAT rate of a particular sector of the economy will therefore lead to high prices of the goods produced by the firms in this sector and also on related products. Without an increase in quantity and quality of these goods or services by the producers, there is likely to be inflation. On the other hand, VAT is imposed on these goods so as to reduce the tax burden of the firm. To reduce consumption of certain goods: In a society, there are some goods which are produced legally but are seen as unhealthy to individuals that consume them. Some of these goods are cigarettes, alcohol, which are said to have adverse effect on the consumers. Government through the use of VAT can reduce/discourage consumption of these harmful or unhealthy goods as additional prices or a certain percentage of its normal price will be added to its normal price and some consumers will be deprived of consuming more of these goods. To stimulate local productivity: VAT can be said to have more effects in stimulating or inducing productivity of local goods in the economy. A removal/reduction of VAT rate in a sector serves as an incentive or simply implies that the government is trying to increase output in that sector. This would also attract investors in other sectors and thereby production will be increased and also the demand for these goods produced is likely to increase since there will be a fall in price of the products. To control the prices of some goods: Sometimes governments find it necessary to fix prices of certain commodities. The price may be fixed to prevent it from seeking its own level of interaction of demand and supply. The price may be fixed so as to prevent it from rising/falling above/below a certain level; this can be attained through the use of VAT by increasing its rate thereby increasing its price and also reducing its VAT rate which will also lead to a fall in its price. Income distribution: VAT is sometimes said to have adverse effect on income distribution. Unlike income tax- tax is usually charged on income earned, VAT is usually levied on the prices of goods and therefore, the goods are sold in uniform prices irrespective of the consumer’s income. This therefore extends the gap between the rich and the poor in the society and the poor will have to work all day with increased retiring age resulting to a fall in the standard of living. In some countries, VAT on the other hand is charged on luxury goods and goods of necessity are sometimes left out or charged with low VAT rate. This therefore brings to normal the income distribution. On balance of payment: A VAT is considered advantageous to a country’s balance of trade as it can be used to increase export by reducing its rate on goods that are to be exported thereby reducing its price which might lead to an increase in foreign demand. On the other hand, VAT rate can be increased on exports that its demand is said to be inelastic i.e. a change in price does not lead to a change in quantity demanded. These measures are said to stimulate exports VAT as highlighted above has great effect on the growth of the economy. A VAT rate could go a long way to ensure fastened growth of the economy as well as decelerate the growth rate of the economy. It is necessary that the government should take into consideration many factors before administering VAT rate to any sector of the economy.