A value-added tax (VAT) or also General Sales tax (GST) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
Value-added tax directly affects manufacturers, distributors, retailers, and consumers. By taxing value-added creation in each phase of the production cycle through final consumption, a value-added tax system achieves a number of important benefits.
VAT is collected incrementally, at every stage of the production process. This creates a level of tax transparency that is often lacking in other types of transactional taxes (e.g., sales tax).
As products pass through each stage of the production cycle, sellers are required to collect and remit VAT to government bodies. The result is a more equitable business environment in which all businesses (not just retailers) are responsible for tax collection and remittance procedures.
VAT reduces the likelihood of tax fraud because participants often claim a credit for taxes previously paid by their suppliers, and are thus motivated to hold them accountable to ensure that they have properly paid VAT.