VAT (Value Added Tax)
VAT or value added tax that applies to all commercial activities regarding the distribution of goods and provision of services. It is a consumption tax because ultimately the final consumer bears the weight of the tax. It is not charged on the businesses even though businesses pay the tax to the revenue authorities because it is included in the price of the product or service and the customer pays for it. It is the tax on the value added to a product or material, where the value added is the sales price charged by the business to its customers minus the cost of production (materials and other taxable input). VAT is charged as a percentage of the final price, which makes it visible in each stage of the production and distribution chain.
VAT is collected via a system of partial payments whereby VAT-registered businesses deduct from the amount of VAT they have collected the amount of tax they have paid to other taxable persons through purchases necessary for their business activities. This system of “fractional collections” ensures the neutrality of the tax, regardless of the number of transactions and double taxation is avoided.
A taxable person (for VAT purposes) is any individual, partnership or company that supplies taxable goods and/or services in the course of doing business. Some businesses whose annual turnover is less than a certain limit are not obligated to charge VAT on their sales. These thresholds vary from country to country depending on their government’s fiscal policies.