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Value-added tax (VAT) is a type of indirect tax that is levied on the value added to goods and services at each stage of production and distribution. Businesses charge VAT to customers, who then pay it to the government. VAT is distinct from sales tax, which is only levied at the point of final sale.
Compared to sales tax, VAT has some advantages and downsides. Since businesses have the incentive to report their sales and purchases in order to claim VAT credits, one benefit of VAT is that it can decrease tax evasion and fraud. Another benefit is that since VAT avoids cascading taxes and exempts exports, it can be more effective and equitable. Since businesses must keep track of their input and output taxes and file regular returns, VAT can be more difficult and expensive to administer. Due to the higher tax burden, it places on low-income consumers who spend a bigger percentage of their income on goods and services, VAT can also be regressive, which is a drawback.
VAT rates differ between nations and industries. While some nations have multiple rates or exemptions for specific items, others have a single rate of VAT for all goods and services. For instance, in the European Union, the usual VAT rate runs from 17% to 27%, but various items and services, such as food, books, health care, education, etc., have lower rates or zero rates. The national VAT in certain nations, like Canada and Australia, is supplemented by provincial or state-level VATs.
VAT is one of the most common forms of taxation in the world. By 2018, the Organization for Economic Co-operation and Development (OECD) reported that more than 160 nations had implemented VAT, which accounted for 20% of global tax receipts. For many developing nations, notably those in Africa and Asia, VAT is a significant source of revenue because it may be used to fund infrastructure and public services.
