Glossary
Value-Added Tax (VAT)
A consumption tax added to goods and services
Value added tax is charged when goods or services are bought. Consumers bear it, but businesses collect and remit it — it is the amount shown on the receipt.
The name reflects that tax attaches only to the value added at each stage. A company buying materials and selling a processed product pays tax on the value it added, deducting what was paid earlier in the chain.
This avoids taxing the same value repeatedly. However many distribution stages exist, the final consumer pays the same amount — which is why so many countries use the system.
Its defining feature is applying the same rate regardless of income, making it regressive: the burden weighs more heavily on lower incomes. Many countries lower or waive the rate on food and healthcare to soften this.
For business owners, claiming input tax credits matters. VAT included in business expenses can be recovered, but only with proper documentation.