What is VAT?

Value Added Tax (VAT) logo

Value Added Tax (VAT) is a type of indirect tax that is imposed at each stage of the production and distribution chain. It is a consumption tax that is ultimately borne by the end consumer. VAT is applied to the value added to a product or service at each stage of its production or distribution.

Here's how VAT typically works:

Production/Manufacturing Stage:

1. When a manufacturer produces a product, they pay VAT on the raw materials they purchase. The manufacturer adds value to the product during the production process. Distribution/Wholesale Stage:

2. The wholesaler buys the finished product from the manufacturer and pays VAT on the purchase price. The wholesaler adds value to the product by distributing it to retailers. Retail Stage:

3. The retailer buys the product from the wholesaler and pays VAT on the purchase price. The retailer adds value to the product by selling it to the end consumer. End Consumer Stage:

4. The end consumer buys the product from the retailer and pays VAT on the purchase price. The key characteristic of VAT is that it is applied at each stage of the supply chain, but businesses are usually able to offset the VAT they've paid on purchases against the VAT they charge on sales. The end result is that the final consumer bears the burden of the entire VAT.

The VAT rate can vary between countries and may also vary for different types of goods and services. It's a widely used taxation system globally, and many countries have adopted VAT as part of their tax structure.