The Nature and Base of
the Value-added Tax
Value-added taxation can best be seen as a particular means of collecting a general sales tax on consumer goods and services. 1 Tax is collected as goods and services pass through the sequential stages of the production-distribution process, rather than entirely on the final sale to consumers, as under a retail sales tax.
A simple example will help to make this clear. Assume that production involves three stages, A, B, and C (which for most purposes can be identified as manufacturing, wholesaling, and retailing) and that in a given taxable period production and transactions are as shown in table 1. 2 Goods move in a direct line from stage A to stage B to stage C and then to consumers.
Under a 10 percent retail sales tax, $100 in revenue would be obtained on the $1,000 of sales made to consumers at stage C, as indicated in line 5. The same amount of revenue would be collected under the value-added tax, but in an administratively different way. If there were no exclusions from the tax base, each firm would pay tax at the 10 percent rate on its contribution to the value of the final product, or its value added.
|Stage of Production|
|2. Purchased inputs||
|3. Value added (1-2)||
|4. Tax on value added (10% of 3)||
|5. Retail sales tax (10% of Cl)||