Value added tax is a consumption tax assessed on the value added to goods and services at each stage of production and distribution, with the aim of ultimately being borne by the final consumer.
Key Features of VAT:
- Charged on domestic consumption and imports of most goods/services at each transaction point
- Businesses levy VAT on sales but can claim back tax paid on business inputs and investments to prevent double taxation
- VAT revenues contribute substantially to government budgets globally due to its broad application
Example:
A VAT rate reduction on children’s clothing during back-to-school season provided retailers relief intended to lower consumer prices and stimulate spending.
Takeaways:
As a transparent and efficient tax, VAT has wide acceptance worldwide. However, compliance complexity necessitates robust collection systems while exemptions require careful design to avoid unintended consequences on business activity.