Definition:
A Value Added Tax or "VAT" (also referred to as a General Sales Tax or GST) is a consumption tax rather than a sales tax. A VAT taxes the value added at each point in the production cycle; it is assessed on the value added to goods and services.
All European Union countries and many other countries around the world have a VAT or GST. The EU describes a VAT as:
- a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
- a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.
- charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
- collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
- paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.
