Value-added tax definition

What is Value-Added Tax?

A value-added tax (VAT) is an indirect tax on the consumption of goods and services. The value added to a product is computed at each stage of its production and the tax is added based on a proportion of this increase in value. The value-added tax is collected at the point of sale to the final customer; anyone involved in the production chain does not pay the tax. Some goods may be exempted from the VAT so that consumers will pay a lower price; this usually occurs for essential goods that are needed by lower-income people. Nonetheless, because the VAT is based on the amount of consumption, the tax burden tends to fall more heavily on lower-income people who must spend a larger proportion of their incomes on essential items.

How Efficient is the Value-Added Tax?

The value-added tax is highly efficient, because it is difficult for anyone to avoid paying the tax. Thus, tax revenue tends to be higher when the value-added tax is used. This is a particular advantage in countries where there is a tradition of avoidance for other types of taxes.

Where is the Value-Added Tax Used?

The value-added tax is used by the countries in the European Union, as well as many other countries.

Is the Value-Added Tax Charged on Export Sales?

The tax is not charged on export sales, which creates an incentive for producers to export goods. Foreign customers can typically apply for a refund of any VAT paid by them.