Definition
Value added tax (VAT) is an indirect consumption tax collected in stages as a product or service moves through the supply chain. Each registered business charges VAT on its sales, reclaims the VAT it paid on its purchases, and remits the difference to the tax authority. Ultimately the final consumer bears the cost.
Input VAT vs output VAT
- Output VAT: the tax a business charges customers on its sales.
- Input VAT: the tax a business pays suppliers on its purchases.
A business subtracts input VAT from output VAT. If output exceeds input, it pays the balance to the authority; if input is greater, it may reclaim the difference.
VAT vs sales tax
VAT is collected at every stage of production and distribution, with businesses reclaiming what they paid, so tax is only ever charged on the added value. A sales tax is typically charged once, at the final point of sale to the consumer. VAT's staged, self-policing design makes it harder to evade and easier to audit.
Rates by country
VAT rates, thresholds, and exemptions are set nationally and differ widely, so always check the rules that apply where you trade.