Governments worldwide require citizens to pay taxes. One of the most popular types of tax is VAT (Value-Added Tax).
In this article, we will discuss VAT, explain how it works, share some examples, and explain why it matters.
What is It?
VAT is an acronym for value-added tax. This type of tax is best described as a consumption tax added to the price of a product’s sales.
A VAT represents a tax on the “value-added” to the item you purchase throughout its production process.
How VAT Works?
The Value Added Tax system is invoice-based. Every seller in the product chain adds a VAT charge to the customer’s invoice.
Under a VAT tax system, the sellers must collect and pay the value-added tax to the government.
The VAT offers sellers in the supply chain a straightforward economic motivation to generate the charge from buyers, thereby reducing the incidence of tax evasion.
Many people confuse the value-added tax with sales tax, but they are entirely different. In the case of a sales tax, the charge is only collected once at the consumer’s point of purchase.
However, the value-added tax is taken every time a business purchases items from other businesses along the product’s supply chain.
Why VAT Matters?
Value-added tax (VAT) is a very efficient flat consumption tax that lessens non-compliance. Over 100 countries on different continents have adopted the VAT system, with rates ranging between 10% and 25%.
Investors who are looking for safer investment opportunities overseas should consider whether the prospective country uses a value-added tax system, which indicates a very stable fiscal environment.
If you have questions about this article or would like suggestions, please do not hesitate to leave them in the comments section below.
