We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Value Added Tax?

Mary McMahon
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A value added tax (VAT) is a type of consumption tax which is levied on goods and services at each level of production. The way in which value added taxes work is a little bit complex, but it is designed to distribute the tax burden, and it can be used to generate high tax revenues without impacting one particular group of individuals more than others. In practice, nations with a VAT tend to tax the poor proportionately more than others, which has been a topic of criticism from some concerned organizations and individuals.

The way in which a value added tax works is that at each stage of the process from construction of an item to sale to a final consumer, the product is taxed, and the tax owed equals a percentage of the value, minus the taxes paid by previous people in the chain. In a simple example, a clothing manufacturer could buy cotton fabric for $100 United States Dollars (USD) a bale, and pay a 10% tax of $10 USD on each bale. When the manufacturer sold the dyed cotton to a retailer for $130 USD a bale, the tax liability would be $12 USD, but since $10 USD had already been paid by the manufacturer, the retailer would pay $2 USD under a VAT scheme. A consumer who bought a bale of the cotton for $200 USD would have a tax liability of $20 USD, minus the $12 USD in taxes already paid, which would work out to $8 USD in taxes due.

Under a value added tax system, every time value is added to a product, it is taxed. Although the example above was given in United States Dollars, VAT is actually much more common in the European Union (EU). It was first introduced in France in 1954, and later adopted by a number of other EU nations. Today, VAT represents a substantial chunk of tax revenue for many EU governments, and it is sometimes a bone of contention, as some people resist consumption taxes because they can have a penalizing effect on some consumers.

The amount of a value added tax can vary considerably, with some rates being below 10%, while others are almost 30%. Visitors to nations with a value added tax system can often obtain a refund on the VAT they pay for products they are taking out of the country, although this does require some filing of paperwork and discussion with customs officials. Some businesses are also entitled to VAT refunds, in systems which vary from nation to nation.

The use of a goods and services tax (GST), as value added taxes are sometimes known, is also designed to discourage the market for illegal goods such as forged and smuggled products. In regions where a high sales tax is levied, the market for illegal products which allow people to avoid paying the sales tax can be large, while VAT taxes tend to discourage this behavior.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.