Definition of Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax that is levied on goods and services sold in Europe. It is also known as Goods and Services Tax (GST) or Sales Tax. This tax applies to all stages of production and distribution, with each stage adding value to the product or service.
VAT is calculated on the value that is added at each stage of production, and it is based on the difference between the price of the goods or services and the cost of the materials and expenses incurred in producing them. Essentially, VAT is a tax on the value added to the product from its raw material state to the finished product sold to the end customer.
VAT is a broad-based tax that applies to most goods and services, including imports and exports. The tax is typically charged as a percentage of the sale price and is collected by the vendor or supplier at the point of sale. The amount of VAT paid by the end customer is included in the purchase price of the goods or services they buy.
Under certain circumstances, businesses registered for VAT can claim back the VAT paid on their purchases, also known as Input Tax. This means that the net VAT payable to the government is the difference between the VAT collected from the sales and the VAT paid to suppliers.
In conclusion, VAT is a tax applied to goods and services sold in Europe and is calculated based on the value added at each stage of production and distribution. Businesses registered for VAT can claim back the VAT paid on their purchases, which reduces the net VAT payable to the government.
« Back to Glossary Index