A type of consumption tax levied on the value added at each stage of a good or service’s production and distribution process. It is an indirect tax, meaning the end consumer ultimately bears the cost, even though businesses collect and remit the tax to the government. Here are the key features of VAT:
- Multi-stage: VAT is applied at multiple points in the supply chain, with each business collecting tax on its sales and receiving credit for the VAT it paid on its purchases. This prevents double taxation.
- Consumption-based: The final burden of the tax falls on the end consumer who purchases the good or service.
- Widely used: VAT is a common form of taxation globally, implemented in over 160 countries. It is a significant source of revenue for many governments.
- Exemptions and reduced rates: Some goods and services may be exempt from VAT or subject to reduced rates, often for social or economic reasons (e.g., basic necessities, healthcare, education).
VAT differs from a sales tax in that a sales tax is collected only at the final point of sale, while VAT is collected at each stage of production and distribution. This multi-stage collection mechanism aims to ensure a fairer distribution of the tax burden and minimize tax evasion.
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