value-added tax

noun
Updated on: 13 Oct 2017

Definition of value-added tax

: an incremental excise that is levied on the value added at each stage of the processing of a raw material or the production and distribution of a commodity and that typically has the impact of a sales tax on the ultimate consumer

First Known Use of value-added tax

1935


Financial Definition of VALUE-ADDED TAX

value-added tax

What It Is

A value added tax (VAT) is a consumption tax added to a product's sales price. It represents a tax on the "value added" to the product throughout its production process.

How It Works

The VAT system is invoice-based. Each seller in the product chain includes a VAT charge on the buyer's invoice. Under a VAT taxation system, all sellers collect the tax and then pay it to the government. The VAT gives sellers along the supply chain a direct economic motivation to collect the tax, thereby reducing the incidence of tax evasion.

Don't confuse the VAT with sales tax. Under a sales tax, the tax is collected only once at the consumer's point of purchase. The VAT tax, however, is collected every time a business purchases products from other businesses within the product's supply chain.

Why It Matters

The VAT is a highly efficient flat consumption tax that reduces the incidence of non-compliance. More than 100 countries have adopted it -- with rates ranging from 10% - 25%.

Investors who are looking for safer overseas investments should consider whether the prospective country uses a VAT, which indicates a more stable fiscal environment.


VALUE-ADDED TAX Defined for English Language Learners

value-added tax

noun

Definition of value-added tax for English Language Learners

  • : a tax that is added to products at each stage of their production


Law Dictionary

value-added tax

noun value-ad·ded tax

legal Definition of value-added tax

: a tax levied at each addition of value in the processing of a raw material, the performance of a service, or the production and distribution of a commodity with each payer except the consumer reimbursed from payment at the next stage called also VAT

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