Taxes levied on the added value of goods and services are:
a. All of the above are correct.
b. Value added tax
c. Corporate income tax
d. Personal income tax
The correct answer and explanation is:
Correct answer: b. Value added tax
Explanation (300 words):
Taxes come in many forms, and one major category is indirect taxes, which are levied on the consumption of goods and services. Among these, the Value Added Tax (VAT) is a key example.
Value Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain—from production to the final sale. For instance, if a manufacturer buys raw materials, turns them into a product, and sells to a retailer, each party adds value to the product. At each of these stages, VAT is applied on the value added, not the total sales amount.
This tax is ultimately paid by the end consumer, but it is collected and submitted to the government by businesses. It differs from sales tax in that it is collected multiple times during the production and distribution process, whereas sales tax is usually collected only at the final point of sale.
Now let’s look at the other choices:
- Corporate income tax is a direct tax on the profits of corporations, not on goods or services.
- Personal income tax is also a direct tax, levied on an individual’s earnings or income, not related to the value of goods or services.
- “All of the above are correct” is incorrect because only Value Added Tax fits the definition of a tax on the added value of goods and services.
Therefore, the only correct choice is:
b. Value Added Tax
It is widely used across the world, especially in Europe and many parts of Africa, including Kenya, where VAT is a key source of government revenue. It ensures that the government earns tax at each point in the economic process, making it an efficient tool for tax collection.