A trader purchases goods worth ₦80,000 and sells them for ₦120,000. If the government imposes a Value Added Tax (VAT) of 7.5% on the value added, the VAT payable by the trader is

VAT is charged on the value added at each stage of production. The value added by the trader is ₦120,000 − ₦80,000 = ₦40,000. VAT payable = 7.5% × ₦40,000 = ₦3,000. Common errors include applying the rate to the selling price (giving ₦9,000) or the cost price (giving ₦6,000).