Value-Added Tax

A Value-Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is typically collected by businesses on behalf of the government and is charged at each point of sale. The tax is assessed based on the increase in value of the product at each stage, rather than the total value of the product at the final sale.

For example, if a manufacturer produces a widget for $10 and sells it to a retailer for $15, the VAT is applied only on the $5 value added by the manufacturer. If the retailer then sells the widget for $20, the VAT is applied on the additional $5 added by the retailer. The tax is usually a percentage of the value added, such as 20%.

Cases of VAT include:

• Standard VAT: Commonly applied in many countries, such as the UK and EU member states.
• Reduced VAT: Lower rates for specific goods, like food or children’s clothing.
• Zero-rated VAT: Certain goods and services, like exports, may be taxed at 0%.