What is a Value Added Tax (VAT)?

A Value Added Tax (VAT) is fundamentally a consumption tax that is levied on the value added to goods and services at each stage of production or distribution. This means that as a product moves through its supply chain, from the initial creator to the final sale to the consumer, VAT is applied to the increase in value at each step. Therefore, consumers ultimately bear the cost when they purchase products, which makes it a key component in the pricing structure of goods and services in countries that implement it.

This type of tax is distinct from others, such as taxes on profits, which apply to businesses rather than the final consumer, or tariffs on imported goods, which are targeted differently within trade policies. Additionally, VAT is not restricted to luxury items; it is a broad-based tax applied to a wide array of goods and services, making it a significant source of revenue for governments. Understanding VAT is crucial for businesses operating internationally, as it impacts pricing, cash flow, and regulatory compliance in different markets.