Concept Definition
What is VAT?
VAT (Value Added Tax) is a consumption tax levied at each stage of the supply chain on the value added by each producer or distributor. The end consumer bears the full tax. Businesses collect VAT on sales (output VAT) and reclaim VAT paid on purchases (input VAT). VAT is used in over 160 countries.
How does the VAT mechanism work?
VAT operates as a chain of tax credits and collections across the supply chain:
- Supplier charges output VAT on sales and remits to tax authority.
- Buyer pays VAT on purchase (input VAT) and reclaims it from tax authority.
- Net effect: Only value added at each stage is taxed. The end consumer cannot reclaim VAT.
- Invoice requirement: A valid VAT invoice is required for input VAT recovery.
Frequently Asked Questions
- What is the difference between VAT and GST?
- VAT and GST (Goods and Services Tax) are functionally equivalent multi-stage consumption taxes. GST is the term used in Australia, Canada, India, Singapore, and New Zealand. VAT is the term used in the EU, UAE, and most of Africa and Asia. The mechanism is identical.
- Who is responsible for remitting VAT?
- Normally the supplier charges and remits VAT. Under reverse charge rules for certain cross-border B2B transactions, the buyer is responsible for accounting for the VAT. The supplier issues a zero-rated invoice with a reverse charge notation.