Value-Added Tax (VAT)
BeginnerAlso known as: VAT Value-added tax (VAT) is a consumption tax charged on goods and services at each stage of production and distribution, where each business pays tax only on the value it adds, and the full tax is ultimately paid by the final consumer. VAT is used in more than 170 countries, including all European Union members, the United Kingdom, Australia and New Zealand, where it is called goods and services tax, and India. The United States is a notable exception, relying instead on state and local sales taxes. Each business charges VAT on its sales and can reclaim the VAT it paid on its purchases. It passes the difference to the government. For example, with a 20% VAT rate, a manufacturer sells goods to a retailer for 100 plus 20 VAT. The retailer sells them to a consumer for 150 plus 30 VAT. The retailer pays the government 10, the 30 it collected minus the 20 it paid. In total, the government receives 30, which is 20% of the final price of 150. Because tax is collected at each stage, VAT is harder to evade than a single sales tax collected only at the final sale. Many countries apply reduced or zero rates to essentials such as food or children's clothing. VAT is often regarded as regressive, since lower-income households spend more of their income.
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