Value Added Tax (VAT)

A tax added at each stage of production or sale.

QUICK ANSWER

Value Added Tax is a consumption tax applied at each stage of production or distribution, based on the value added at each step.

In depth

VAT is a multi-stage tax applied throughout the supply chain, where each participant pays tax on the value they add to a product or service. Businesses collect VAT on sales and can claim credits for VAT paid on purchases, ensuring tax is only applied to incremental value. While not used in the US, VAT is common globally. Startups operating internationally must understand VAT compliance, registration thresholds, and filing requirements. Proper management ensures accurate pricing and avoids penalties.

Example

Let’s consider a real-world example of VAT calculation.

Product selling price: $100
VAT rate: 10%

VAT collected = $100 × 10% = $10

If the business paid $4 in VAT on inputs:
Net VAT payable = $10 – $4 = $6