VAT

Value-Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. Unlike a sales tax, which is collected only at the final point of sale to consumers, VAT is collected incrementally at every step of the supply chain, with businesses receiving credits for the tax they pay on their inputs. For example, a manufacturer charges VAT when selling to a wholesaler, who then charges VAT when selling to a retailer—each party remits the difference between VAT collected and VAT paid.

In international trade, VAT plays a critical role in ensuring tax neutrality across borders. Exported goods are typically zero-rated, meaning they are exempt from VAT in the country of origin, while imports are taxed at the standard rate in the destination country. This system is designed to prevent double taxation and maintain competitive balance, ensuring that foreign and domestic goods face the same tax treatment when entering a market.

Economically, VAT is considered an efficient and broad-based tax that generates significant revenue for governments while minimizing economic distortions. However, it can be regressive if not paired with compensatory social policies, as it consumes a larger share of income from lower earners. In developing economies, VAT is often a key component of tax reform due to its transparency, ease of enforcement, and relative stability in revenue generation.

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