VI. THE PRODUCTION ACCOUNT
J. Basic, producers' and purchasers' prices
1. Introduction
| 6.204. | More than one set of prices may be used to value outputs and inputs depending upon how taxes and subsidies on products, and also transport charges, are recorded. Moreover, value added taxes, (VAT), and similar deductible taxes may also be recorded in more than one way. The methods of valuation used in the System are explained in this section. |
2. Basic and producers' prices
| 6.205. | The System utilizes two kinds of output prices, namely, basic prices and producers' prices:
(a) The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer;
(b) The producer's price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any VAT, or similar deductible tax, invoiced to the purchaser. It excludes any transport charges invoiced separately by the producer.
The amounts charged by non-market producers when they sell output at prices that are not economically significant do not constitute basic or producers' prices as just defined. Prices that are not economically significant are not used to value the output sold at such prices: instead, such output is valued by its costs of production (see paragraph 6.220). Neither the producer's nor the basic price includes any amounts receivable in respect of VAT, or similar deductible tax, invoiced on the output sold. The difference between the two is that to obtain the basic price any other tax payable per unit of output is deducted from the producer's price while any subsidy receivable per unit of output is added. Both producers' and basic prices are actual transaction prices which can be directly observed and recorded. Basic prices are often reported in statistical inquiries and some official "producer price" indices actually refer to basic prices rather than to producers' prices as defined here. When output produced for own final consumption, or own gross fixed capital formation, is valued at basic prices, it is valued at the estimated basic prices that would be receivable by the producer if the output were to be sold on the market. |
| 6.206. | When output is recorded at basic prices, any tax on the product actually payable on the output is treated as if it were paid by the purchaser directly to the government instead of being an integral part of the price paid to the producer. Conversely, any subsidy on the product is treated as if it were received directly by the purchaser and not the producer. The basic price measures the amount retained by the producer and is, therefore, the price most relevant for the producer's decision-taking. It is becoming increasingly common in many countries for producers to itemize taxes separately on their invoices so that purchasers are informed about how much they are paying to the producer and how much as taxes to the government. |
VAT and similar deductible taxes
| 6.207. | Many countries have adopted some form of VAT. VAT is a wide-ranging tax usually designed to cover most or all goods and services. In some countries, VAT may replace most other forms of taxes on products, but VAT may also be levied in addition to some other taxes on products, such as excise duties on tobacco, alcoholic drink or fuel oils. |
| 6.208. | VAT is a tax on products collected in stages by enterprises. There exist in some countries taxes that are narrower in scope than VAT but may also be deductible by producers. They are treated in the System in the same way as VAT. Producers are required to charge certain percentage rates of VAT on the goods or services they sell. The VAT is shown separately on the sellers' invoices so that purchasers know the amounts they have paid. However, producers are not required to pay to the government the full amounts of the VAT invoiced to their customers because they are usually permitted to deduct the VAT that they themselves have paid on goods and services purchased for their own intermediate consumption or gross fixed capital formation. Producers are obliged to pay only the difference between the VAT on their sales and the VAT on their purchases for intermediate consumption or capital formation - hence the expression value added tax. VAT is not usually charged on sales to non-residents - i.e., exports. The percentage rate of VAT is also liable to vary between different categories of goods and services and also according to the type of purchaser. |
| 6.209. | The following terminology needs to be defined:
(a) Invoiced VAT: this is the VAT payable on the sales of a producer; it is shown separately on the invoice which the producer presents to the purchaser;
(b) Deductible VAT: this is the VAT payable on purchases of goods or services intended for intermediate consumption, gross fixed capital formation or for resale which a producer is permitted to deduct from his own VAT liability to the government in respect of VAT invoiced to his customers;
(c) Non-deductible VAT: this is VAT payable by a purchaser which is not deductible from his own VAT liability, if any.
Thus, a market producer is able to recover the costs of any deductible VAT payable on his own purchases by reducing the amount of his own VAT liability in respect of the VAT invoiced to his own customers. On the other hand, the VAT paid by households for purposes of final consumption or fixed capital formation in dwellings is not deductible. The VAT payable by non-market producers owned by government units or NPIs may also not be deductible. |
Gross and net recording of VAT
| 6.210. | There are two alternative systems that may be used to record VAT, i.e., the "gross" or "net" systems. Under the gross system all transactions are recorded including the amounts of any invoiced VAT. Thus, the purchaser and the seller record the same price, irrespective of whether or not the purchaser is able to deduct the VAT subsequently. |
| 6.211. | While the gross system of recording seems to accord with the traditional notion of recording at "market" prices, it presents some difficulties. First, practical experience with the operation of VAT over many years in a number of countries has shown it may be difficult, if not impossible, to utilize the gross system because of the way in which business accounts are computed and records are kept. Sales are normally reported excluding invoiced VAT in most industrial inquiries and business surveys. Conversely, purchases of goods and services by producers are usually recorded excluding deductible VAT. Although the gross system has been tried in some countries, it has had to be abandoned for these reasons. Secondly, it can be argued that the gross system distorts economic reality to the extent that it does not reflect the amounts of VAT actually paid by businesses. Large amounts of invoiced VAT are deductible and thus represent only notional or putative tax liabilities. |
| 6.212. | The System therefore requires that the net system of recording VAT should be followed. In the net system:
(a) Outputs of goods and services are valued excluding invoiced VAT: imports are similarly valued excluding invoiced VAT;
(b) Purchases of goods and services are recorded including non-deductible VAT.
Under the net system, VAT is recorded as being payable by purchasers, not sellers, and then only by those purchasers who are not able to deduct it. Almost all VAT is therefore recorded in the System as being paid on final uses - mainly on household consumption. Small amounts of VAT may, however, be paid by businesses in respect of certain kinds of purchases on which VAT may not be deductible. |
| 6.213. | The disadvantage of the net system is that different prices must be recorded for the two parties to the same transaction when the VAT is not deductible. The price recorded for the producer does not include invoiced VAT whereas the price recorded for the purchaser does include the invoiced VAT whenever it is not deductible. Thus, on aggregate, the total value of the expenditures recorded for purchasers must exceed the total value of the corresponding sales receipts recorded for producers by the total amount raised in non-deductible VAT. |
| 6.214. | The traditional concept of the "market" price becomes somewhat blurred under a system of VAT or similar deductible taxes because there may be two different prices for a single transaction: one from the seller's point of view and another from the purchaser's, depending upon whether or not the tax is deductible. Moreover, it is difficult to interpret the producer's price defined to exclude invoiced VAT - i.e., a tax on a product - as a "market" price in the traditional sense of that term. The producer's price thus defined is a hybrid which excludes some, but not all, taxes on products. The basic price, which does not include any taxes on the output (but includes subsidies on the output) becomes a clearer concept in these circumstances and, partly for this reason, is the preferred method for valuing the output of producers. |
3. Purchasers' prices
| 6.215. | The purchaser's price is the amount paid by the purchaser, excluding any deductible VAT or similar deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser's price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place. |
| 6.216. | When comparing the purchaser's price with the producer's or basic price, it is important to specify whether they refer to the same transaction or two different transactions. For certain purposes, including input-output analysis, it may be convenient to compare the price paid by the final purchaser of a good after it has passed through the wholesale and retail distribution chains with the producer's price received by its original producer. In this case the prices refer to two different transactions taking place at quite different times and locations: they must differ at least by the amount of the wholesale and retail trade margins. |
| 6.217. | When the prices refer to the same transaction, that is, the purchaser buys directly from the producer, the purchaser's price may exceed the producer's price by:
(a) The value of any non-deductible VAT, payable by the purchaser; and
(b) The value of any transport charges on a good paid separately by the purchaser and not included in the producer's price.
It follows that the purchaser's price may exceed the basic price by the amount of the two items just listed plus the value of any taxes less subsidies on the product (other than VAT). |
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