Value Added Tax

The value-added tax (also known as VAT) is a tax on the “value added to the product”. Unlike a direct sales tax, VAT is collected and paid to government agencies at each step in the supply chain when a business buys product. Businesses that buy products to further produce a product to be sold to other business in the supply chain or to end customers can recover the VAT they were charged when buying product. End customers, however, cannot recover VAT on purchases. In this way, businesses owe tax on some percentage of the price of the product minus any previous taxes paid for the product. The tax paid by each business in the supply chain is a fraction of the value added by a business to its products. VAT is used predominantly in Europe, Nordic nations like Denmark, Norway, Sweden, and Iceland, as well as India and Mexico, New Zealand, Australia and Canada.

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