What is a value-added tax (VAT)?

A value-added tax (VAT) is indeed defined as an indirect tax on consumption that is assessed at each stage of production and distribution. This means that VAT is charged on the value that is added at each step of the manufacturing process, from raw materials to the finished product. Each business in the production chain pays VAT on the value they add, which is ultimately passed on to consumers in the form of higher prices.

The essence of VAT is that it allows for taxation at multiple points in the supply chain rather than just at the point of sale to the final consumer. This system can enhance revenue for governments because it captures tax income as goods and services progress through the supply chain, and it reduces tax evasion opportunities since businesses can claim credits for the VAT they pay on inputs. The structure is designed to avoid cascading taxes where multiple layers of tax are levied on the same goods, ensuring a more efficient and equitable system of consumption taxation.