The tax which is add-on at each steps of a production-distribution chain. 

1. The value added is equivalent to the sum of wages to labor and profits to owners of the production factors including land and capital. 

2. The value is simply measured as the difference between the value of output and the cost of inputs.


A. Addition Method

In this method, value added is calculated by summing the payments made by firm to the different factors of production employed in production processes such as wages, rent, interest and profit.  It is suitable for income type of VAT

B. Subtraction Method

By subtracting the total cost of materials from sale proceeds that is net turnover. This is suitable for consumption type VAT.

C. Tax Credit Method/ Invoice method

Under this method, tax is imposed on total value of sales and taxpayers are allowed to deduct from their gross tax liability the taxes already paid by their suppliers and pass on to them. 

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