VAT is a tax on what?

• A. The value added to goods and services
• B. Corporate profits only
• C. Wages and salaries
• D. Land ownership

Answer: (A)

VAT is a tax on the value added to goods and services as they pass through production and distribution. It’s a consumption tax collected by businesses on behalf of the government. At each stage, a business charges VAT on its sales (output VAT) and can reclaim the VAT it paid on its inputs (input VAT). The difference goes to the government, which basically tax the value that each stage adds.

For example, if a product is sold for 100 before VAT and the rate is 20%, output VAT is 20. If the business paid 60 for inputs and paid 12 VAT on those inputs, the net VAT to the government is 8. That 8 corresponds to 20% of the value added (40) at that stage, showing that VAT targets the added value, not profits, wages, or land ownership.

So VAT is not a tax on corporate profits, wages, or land; it’s a tax on the value added to goods and services.