Value-added tax
Form of consumption tax / From Wikipedia, the free encyclopedia
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A value-added tax (VAT or goods and services tax (GST)), is a tax that is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is a business that collects and pays VAT on its products or services, it can reclaim the tax paid. It is similar to, and is often compared with, a sales tax. VAT is an indirect tax because the person who ultimately bears the burden of the tax may not be the person who pays the tax to the tax authorities.
Not all countries or localities assess VAT, and exports are often exempt in those that do. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the consumer and applied to the sales price. The terms VAT, GST, and general consumption tax (GCT) may be used interchangeably. VAT raises about a fifth of total tax revenues worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD).[1]: 14 As of June 2023, 175[2] of the 193 countries with UN membership employ a VAT, including all OECD members except the United States.[1]: 14 Many US states instead levy a sales tax.
The two main methods of calculating VAT are the credit-invoice/invoice method and the subtraction/accounts-based method. In the former, sales transactions are taxed, the customer is informed of the tax, and businesses can apply for a credit for the VAT it paid on input materials and services. The credit-invoice method is the most common and is used by all national VATs except Japan.
In the subtraction method, a business at the end of a reporting period calculates the value of all taxable sales, subtracts the sum of all taxable purchases, and applies the VAT to the difference. The subtraction VAT is used only by Japan although it is part of many recent tax reform proposals.[3][4][5] Both methods offer exceptions for certain goods and services.