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VAT . . . a Good Thing?
The tax-free environment in the GCC is set to change, VAT will help GCC economies experience diversified growth, says Mas Meghji
May 17, 2012 3:18 by kippreport
Value added is the value that a producer adds to raw materials inputs, excluding labor inputs. Labor is hired to use those raw material inputs to turn them into output (goods and services) which are sold in the market. When the value of the used raw materials inputs is subtracted from the value of the sold output, what is left is the value added. This value added is shared between the labor (who gets wages) and the producer (who gets profit). Thus, the value added can be looked at either from the additive side (i.e., income), which is wages plus profit, or from the subtractive side (i.e., output), which is output minus inputs, Al Hadi explained.
There are four possible ways to levy a tax on value added and these are additive direct method (known as accounts method); additive indirect method; subtractive direct method (known as business transfer tax method); and subtractive indirect method (known as invoice/credit method). Most countries, who have adopted the VAT, have used the invoice/credit method.
The VAT is a tax imposed on all sales of goods and services at every stage of production. Therefore, the VAT revenue is collected throughout the production process, and not collected only at the point of sale to the final consumer. One key feature of the VAT is that it credits taxes paid by businesses on their inputs against the taxes they must levy on their own sales. Hence, producers reclaim the tax they have been charged on their inputs.