A value-added tax (VAT) is a
consumption tax that is levied on a product repeatedly at every point of sale at which value has been added.That is, the tax is added at several steps, including when:
– A
raw materialsproducer sells a product to a factory
– The factory sells the finished product to a wholesaler
– The wholesaler sells it to a retailer
– The retailer sells it to the consumer who will use it
The total amount of the VAT is based on the cost of the product minus any costs of materials in the product that have already been taxed at a previous stage.
Keep reading to find out more about this tax, where it’s paid, and different examples.
Key Takeaways
– A value-added tax (VAT) is paid at every stage of a product’s production from the sale of the raw materials to its final purchase by a consumer.
– Each assessment is used to reimburse the previous buyer in the chain.So, the tax is ultimately paid by the consumer.
– Opponents say it is unfair to lower-income consumers, who must spend a higher proportion of their income in VAT than wealthier consumers.
– Proponents say it discourages tax avoidance by providing a paper or electronic trail of taxes for every product.
Value-Added Tax (VAT): An Overview
As noted above, a
value-added tax is a type of consumption tax that is added to the price of goods and services at every step during the supply chain.Although it may be passed on from one member of the chain to the next, the retail consumer is the party who ultimately pays the VAT.This means that those in the earlier stages of production are reimbursed by the subsequent buyer in the chain.
VAT is commonly expressed as a percentage of the total cost of a good or service.For example, if a product costs $100 and there is a 15% VAT, the consumer pays $115 to the merchant.The merchant keeps $100 and remits $15 to the government.
The VAT system is used in 174 countries and is most commonly used in European countries.But it is not used in the United States.
Consumers pay this tax on virtually “all goods and services that are bought and sold for use or consumption in the
European Union.” The standard, minimum VAT rate in the EU is 15% while the reduced rate (added to certain goods and services) is at least 5%.The following table highlights VAT rates across the EU.
The standard VAT in the U.K.has been 20% since 2011.The rate is reduced to 5% on certain purchases such as children’s car seats and home energy.
There is no VAT on some items like food and children’s clothing.Financial and property transactions also are exempt.
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