Value-Added Tax (VAT): Definition and Meaning

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All over the world, governments require that citizens pay tax. One of the most popular types of tax is VAT (Value-Added Tax).

In this article, we will discuss what the VAT is, how it works, share some examples, and why it matters.

What it is

A VAT is an acronym that stands for value-added tax. This type of tax is best described as a consumption tax added to the price of a product’s sales.

A VAT represents a tax put on the “value-added” to the item you’re purchasing throughout its production process.

How VAT works/Example

The Value Added Tax system is an invoice-based one. Every seller in the product chain adds a VAT charge on the invoice of the customer. Under a VAT tax system, the sellers are to collect the value-added tax and pay it to the government.

The VAT offers sellers in the supply chain a straightforward economic motivation to generate the charge from buyers, thereby achieving a lesser incidence of tax evasion.

Many people confuse the value-added tax with sales tax, but they are two different things entirely. In the case of a sales tax, the charge is only collected one time at the consumer’s point of purchase.

However, the value-added tax is taken every time a business purchases items from other businesses along the product’s supply chain.

Why VAT matters

The value-added tax is a very efficient flat consumption tax that lessens the cases of non-compliance. Over 100 countries in different continents of the world have adopted the VAT system, with rates ranging between 10% – 25%.

Investors who are on the lookout for safer investment opportunities overseas should consider whether or not the prospective country uses a value-added tax system, which indicates a very stable fiscal environment.

If you have questions about this article or will like to add suggestions, please do not hesitate to leave them in the comments section provided below.

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