Value Added Tax (VAT) is a tax imposed incrementally based on the increase in the value of a product or service at each stage of production or distribution.
VAT mainly offsets the common services and infrastructure provided in a particular area by a country and funded by its taxpayers that were used in the preparation of that product or service. Not all regions require the imposition of VAT and goods and services may be exempt for export (duty-free). VAT is usually applied as a destination-based tax where the tax rate is based on the location of the consumer and is applied to the selling price. Confusingly, the terms value-added tax, goods and services tax, consumption tax, and sales tax are sometimes used interchangeably. The value-added tax raises about a fifth of all tax revenues globally and among OECD members. As of 2018, 166 of the world’s 193 countries use VAT, including all OECD members except the United States, which uses the sales tax system instead.
The method based on the credit invoice or billings and the method based on the subtraction method or accounts. Using the credit invoice method, sales transactions are subject to tax with the customer being informed of VAT on the transaction and businesses may receive a credit for VAT paid on materials and services entered. The credit invoicing method is the most widely used method and is used by all national VATs except Japan. Using the subtraction method, at the end of the reporting period, the business calculates the value of all taxable sales, then subtracts the sum of all taxable purchases and applies the VAT rate to the difference. The subtractive method of VAT is currently only used by Japan although the subtractive VAT method and often using the name “flat tax” have been part of several recent tax reform proposals by US politicians. With both methods there are exceptions in the calculation method for certain goods and transactions that are created for pragmatic collective reasons or to counter fraud and tax evasion.
The amount of VAT is determined by the state as a percentage of the final market price. As its name suggests VAT is designed for value added tax only by a company on top of the services and goods that it can buy from the market.
