Initially, the difference between VAT and income tax is reiterated here. VAT is not a tax imposed on the result of selling the good (profit), but rather a tax imposed on selling it. This indirect tax is also imposed on the constituents of the product in all its production stages. Again, a careful accounting procedure is followed to avoid double counting value added to avoid paying this indirect tax more than once. To establish such a procedure, corporates are advised to recruit accountants versed with dealing comprehensively with VAT. Those special accountants are capable of computing the end selling price based on the incremental increase of manufacturing based on VAT. Additionally, the responsibility of specialized accountants shall include methods by which VAT records and sums (received or paid) are periodically maintained to cope with government requirements.
On the other hand, and prior to the intro stage of implementing VAT, corporates are advised to engage in four stages of analysis:
- i.Incremental investment: This is an analysis during which the business organization observes the macro aspects of its investment in light of the introduction of VAT. Those include manipulation of original business objectives based on the impact of higher prices on consumers as caused by the percentage value added. Some business enterprises, adopting either price skimming penetration or even predatory pricing will be highly affected by the imposition of VAT as the marginal increase in selling price by the value added margin will imply those pricing strategies change mandatorily. Hence, a VAT incremental change to price will eventually limit the liberty of corporates engaging in competitive pricing strategies in the short term.
- ii.Incremental revenues: Prior to the implantation of VAT, a close analysis of projected revenues must be analyzed to determine the best quantity sold to ensure the highest incremental revenue in light of a VAT addition to selling price. This analysis, engaged by financial analysts and economic planners will entail analyzing a number of outputs sold at higher prices in the past. Thus, a 5% value added can be seen by past experience on the reaction of consumers when such a price increase (or any percentage increase near it) was made by the corporate on penetration basis. Incremental revenue projections will eventually lead the stabilization of cash flow in terms of financial expectations.
Incremental costs and expenses: Contrary to incremental revenues, incremental costs and expenses are dealt with in terms of lowering profit levels (margins) when VAT is paid across the production process. The incremental increase in cost shall be tackled by recompiling crude cost (dry cost) of making the good and service upon adding the VAT cost into each stage of production. This pre-implementation positioning and strategy will lead to a proper feasibility analysis of the cost structure of producing versus the acceptable selling price by consumers.
- iv. Cost-effective analysis: Finally, in the pre-implementation of VAT, the cost-effectiveness analysis sums up the expected picture in a positioning strategy towards the expected outcomes post VAT. This analysis entails carrying out financial computations of components and constituents of the product during its production stages integrating all VATs involved. This analysis of VAT integrated costs shall give the producer insights into finding alternatives should the cost structure exceed logical levels, which might prevent selling it. Moreover, from a technical point of view, the production process may undergo a major revision during which some costs will be eliminated if possible. Cost-effectiveness may also lead to a major shuffle entailing a shift from being labor intensive (process that depends mainly on workforce) to capital intensive (process that depends mainly on machinery) or vice versa.