What is the value added in VAT?
Before we delve into the question of value added tax let us understand a few useful terminologies. We know that the economic system exists to provide food, clothes, shelter and other things we require to satisfy our needs and wants. This power or characteristic of satisfying a want is called utility. People have strategies for obtaining their utilities. One of the elements that enter into formulating a strategy is value — the quality of something being useful or desirable.
What then is value added? It is the act or process by which tangible product features or intangible service attributes are bundled, combined or packaged with other features and attributes to create a competitive advantage, reposition a product or increase sales. The essence of “value” is embedded in the trade-off between the benefits a customer receives from a new product and the price a customer pays for it.
As a product moves from raw material to finished good, value is added at each step in the manufacturing and delivery process. This forms a value chain which indicates the relative amount of value added at each of these steps.
Value added therefore refers to the additional value created at a particular stage of production. Take this imaginary situation. You are in Garissa and you want to place a plate of ugali on your table. You go to the shop to buy unga with which to cook the ugali you want.