by Michael Nnopu

Created on: May 18, 2009

Introduction

As societies move away from agrarian economy to modern and industrialized economies, there is need for the provision of basic infrastructures such as good roads, security, among others to keep the society functioning optimally. To provide these services, funds are needed and this necessitates the imposition of Taxes.

Taxation may be defined as the compulsory levy by government through its agencies on the income, capital or consumption of its subjects (Aguolu, 2004). Taxes has been classified into two broad categories: Direct and Indirect Taxes. This classification is based on who bears the final burden of paying the tax. Direct taxes, such as taxes on income or profit, the payer bears final burden while in Indirect tax, the payers shift the burden to the final consumer of the product or service. Although the percentage of the tax to be shifted or borne by the final consumer is determined by several factors, such as elasticity of demand for the product. Examples of Indirect taxes include sales tax, customs tax, Value Added Tax (VAT) etc.

VAT as the name implies is a tax levied on the value added to a specific product or services, and not on the entire product. Many countries of the world adopt various kinds of VAT as a revenue source and fiscal policy instrument available to the government. VAT has been around for quite sometime, since the idea was first muted in Germany in 1919 and adopted in France in 1954 (VAT n.d.), several scholars has provided definitions of VAT.

Nnopu (2009) described VAT as a consumption tax which works by charging a specific percentage of the additional value being added by the supplier, manufacturer, retailer etc as the good or service passes through the supply chain. Oldman (1990:212) describes VAT as a multistage consumption tax levied on the difference between a firm's sales and the value of its purchased inputs used in producing goods.

These two definitions provide a basic understanding of VAT. First, it's a consumption tax; secondly, it is levied on the value added (i.e. difference between sales and value of the purchased inputs) and finally, it is a multistage tax.

Benefits of VAT

For the individual or organization that pays 5% or more as VAT, it can be quite difficult to see any benefit in paying VAT, but nevertheless, there are several benefits that can be directly attributable to VAT, both for the payers and for the government and its agencies.

VAT eliminates Tax cascading. Tax cascading

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