what is vat tax

Value-added tax (VAT) is a type of tax that is assessed incrementally on the price of a product or service at each stage of production, distribution, or sale to the end consumer. It is a consumption tax on goods and services that is levied at each stage of the supply chain where value is added, from initial production to the final purchase by a consumer. VAT is a general, broadly based consumption tax assessed on the value added to goods and services. It is a tax on final consumption, meaning that each business along the production chain is required to pay a VAT on the value of the produced good/service at that stage, with the VAT previously paid for that good/service being deductible at each step. The final consumer, however, pays the VAT without being able to deduct the previously paid VAT. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the consumer and applied to the sales price. VAT is a significant source of tax revenue worldwide, raising about a fifth of total tax revenues both worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD) .