The final production value with VAT includes values added in the production of inputs and in the three stages of the sector (10+60+30+10 = 110), and the VAT of 11, that arises from summing all VAT paid due to inputs of Stage I and due to the corresponding production stages of the sector (2+5+3+1 = 11). That’s why the final price for consumers or households results 121 (= 110+11). From the “accounting” point of view, in the “legal taxpayer” situation, with final sale of Stage III liabilities and fiscal credits compensate each other. For this reason is usually argued (wrongly) that VAT is finally paid by consumers or households. Actually, this tax incidence on households’ welfare is the logic consequence of the forward tax burden transfer assumption (supply curve with infinity price-elasticity and demand curve with normal-negative slope) used to elaborate these examples, but not due to the accounting compensation between liabilities and fiscal credits16.
In Case 2 (Meat) you should notice the negative Net VAT of Stage I and the consequent difference between the Addition VAT and the Invoice VAT Systems, because in the former fiscal credits are not allowed (relative to the VAT charged on input invoices of Stage I). Under the assumption of devolution of the net fiscal credit in favor of the taxpayer, TB results 8%, though the legal tax rate that determines fiscal liability is 10%. The negative plus of Net VAT, or difference in favor of taxpayers, is very common in the Agricultural Sector, due to the different fiscal treatment (higher or “general” tax rate) of many inputs used in the production process relative to sector’s sales (lower or “differential” tax rate). Many taxpayers complain for this reason, because VAT law doesn’t allow the devolution of that difference, neither its compensation with others fiscal liabilities, while considering those net fiscal credits as “saldos técnicos” (technical differences), meaning that they are only accountable for liabilities derived from liabilities of the same tax17.
Liability F. Crédit T (Net)
-1 (+1) -10%(10%)
STAGE III: Trading
STAGE II: Cattle feeding
STAGE I: Land labors
Case 2: Meat production sold to domestic demand only MEAT
Final Result with revenue devolution of “technical difference” (“saldo técnico”) Final Result without devolution of “saldo técnico”
Note: decimals are omitted; little differences are due to calculus simplifications.
16 17 We will go back to this point while considering the Destination VAT in case of tradable goods (exports). Though in the future taxpayer could be allowed to compensate the difference with other tax liabilities, they will anyway suffer the financial cost of the advance payment that wouldn’t be rebated.