A value-added tax (VAT), goods and services tax (GST), or general consumption tax (GCT) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared with, a sales tax. VAT is an indirect tax because individuals do not pay it directly to the government; instead, suppliers act as intermediaries by collecting the tax from customers at the point of sale and remitting it to the government. Specific goods and services are typically exempted in various jurisdictions.

Products exported to other countries are typically exempted from the tax, typically via a rebate to the exporter. VAT is usually implemented as a destination-based tax, with the tax rate determined by the customer's location. VAT raises about a fifth of total tax revenues worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD). As of January 2025, 175 of the 193 countries with UN membership employ a VAT, including all OECD members except the United States.

History German industrialist Georg Wilhelm von Siemens proposed the concept of a value-added tax in 1918 to replace the German turnover tax. However, the turnover tax was not replaced until 1968. The modern variation of VAT was first implemented by Maurice Lauré, joint director of the French tax authority, who implemented VAT on 10 April 1954 in France's Ivory Coast colony. Assessing the experiment as successful, France introduced it domestically in 1958. Initially directed at large businesses, it was extended over time to include all business sectors. In France it is the largest source of state finance, accounting for nearly 50% of state revenues.

Following creation of the European Economic Community in 1957, the Fiscal and Financial Committee set up by the European Commission in 1960 under the chairmanship of Professor Fritz Neumark made its priority objective the elimination of distortions to competition caused by disparities in national indirect tax systems.M.A.G. van Meerhaeghe, Taxation and the European Community, Economia delle Scelte Pubbliche, Vol. VII, 1989-1/2, pp. 18–19.Europäische Wirtschaftsgemeinschaft – Kommission: Bericht des Steuer- und Finanzausschusses (Neumark Bericht), Brüssel 1963.

The Neumark Report published in 1962 concluded that France's VAT model would be the simplest and most effective indirect tax system. This led to the EEC issuing two VAT directives, adopted in April 1967, providing a blueprint for introducing VAT across the EEC, following which, other member states (initially Belgium, Italy, Luxembourg, the Netherlands and West Germany) introduced VAT.

Implementation VAT can be accounts-based or invoice-based. All VAT-collecting countries except Japan use the invoice method.

Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax). Buyers who themselves add value and resell the product pay VAT on their own sales (output tax). The difference between output tax and input tax is the amount paid to the government (or refunded, in the case of a negative amount).

Using accounts, the tax is calculated as a percentage of the difference between sales and purchases from taxed accounts.

Incentives VAT provides an incentive for businesses to register and keep invoices, and it does this in the form of zero-rated goods and VAT exemption on goods not resold. Through registration, a business documents its purchases, making them eligible for a VAT credit.

The main benefits of VAT are that in relation to many other forms of taxation, it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue.

Comparison with sales tax Three examples below demonstrate the chain of transactions between the raw materials producer and the final consumer, in which the government levies no tax the government levies sales tax the government levies a Value-Added Tax.

+ Example 1: Untaxed A manufacturer spends $1.00 on raw materials and uses them to make a widget. The manufacturer sells the widget to a retailer for $1.20 (Gross margin: $0.20) The retailer sells the widget to an end consumer for $1.50 (Gross margin: $0.30)

+ Example 2: 10% sales tax The raw materials producer sells $1 of raw materials for a widget to a manufacturer, checking that the buyer is not an end consumer The manufacturer sells a widget to a retailer for $1.20, checking that the buyer is not an end consumer (Tax paid: $0, Gross margin: $0.20) The retailer sells the widget to a consumer ($1.50 × 1.10) = $1.65 (Tax paid: $.15, Gross margin: $0.30)The end consumer pays 10% ($0.15) extra, compared to the no taxation scheme, and the government collects this amount. The retailer pays no tax directly, but the retailer has to do the tax-related paperwork. Suppliers and manufacturers have the administrative burden of providing correct state exemption certifications that the retailer must verify and maintain. The manufacturer is responsible for ensuring that their buyers are only intermediates and not end consumers (otherwise the manufacturer charges the tax). The retailer tracks what is taxable and what is not, along with the various tax rates in each location where it operates.

+ Example 3: 10% Value-Added Tax The raw materials producer sells $1 of raw materials for a widget to a manufacturer for ($1 × 1.10) = $1.10. (Tax paid: $0.10) The manufacturer sells a widget to a retailer for ($1.20 × 1.10) = $1.32 (Tax paid: $0.12 - $0.10 = $0.02, Gross margin: $1.32 – $1.10 – $0.02 = $0.20) The retailer sells a widget to a consumer for ($1.50 × 1.10) = $1.65 (Tax paid: $0.15 minus $0.12) = $0.03, Gross margin: $1.65 – $1.32 – $0.03 = $0.30) The taxes paid by both the manufacturer and the retailer to the government are 10% of the values added by their respective business practices, i.e. the 10% of the difference between their buying price and selling price. For example, the value added by the manufacturer is $1.20 minus $1.00 = $0.20. The manufacturer pays 10% of $.20 = $0.02. The consumer has paid, and the government received, the same dollar amount as with a sales tax. The gross margins, in dollar amount, remain the same as with a sales tax. The end consumer pays the same final price as with a sales tax. At each stage of production, the seller collects a tax and the buyer pays that tax. The buyer can then be reimbursed for paying the tax, but only by successfully selling the value-added product to the buyer at the next stage. If the retailer fails to sell some of its inventory, it suffers a greater financial loss in the VAT scheme, in comparison to the sales tax regulatory system, by having paid a higher price for the product it failed to sell. The gross margins of the manufacturer and retailer are a smaller percent of the total perspective. If the cost of raw material production were shown, this would also be true of the raw material supplier's gross margin on a percentage basis. Each business is responsible for handling the necessary tax paperwork, and incur the increased accounting costs for collecting the tax. However, businesses have no obligation to request certifications from intermediate purchasers (who are not end consumers), or to provide such certifications to their suppliers.

Compliance One primary reason for the institution of a VAT versus sales tax is to ensure compliance. Because sales tax is only submitted at the final sale to the consumer, the government has little information to verify that a sale has been made or at what price, making enforcement difficult. The retailer and consumer have an incentive to evade the tax with little risk of discovery. With any transaction, the seller is financially motivated to assume the buyer is an intermediate, not a consumer (and therefore, not subject to the sales tax), even if this may result in illegal tax evasion.

By comparison, with VAT every transaction is reported to the government (either through a submission of tax, a reimbursement claim, or both), a trail of information is created for government which helps motivate compliance and facilitate any potential audit. The materials producer, manufacturer, and retailer all know that the others down the chain will submit reimbursement claims, so a failure to report the transaction and pay the tax is likely to draw attention from authorities. Even if retailers evade charging the VAT from the consumer, the government still receives the income at prior stages.

On the contrary, if a seller accidentally charge sales tax to an intermediate buyer, the end price to the consumer will increase.

Business structure VAT has no effect on how businesses organize, because the same amount of tax is collected regardless of how many times goods change hands before arriving at the ultimate consumer. By contrast, sales taxes, when collected on intermediate transactions in addition to final consumption, encourage businesses to vertically integrate to reduce the number of transactions and thereby reduce the amount of tax paid.

Because of the difficulty of exempting intermediate transactions in a sales tax, VAT has been gaining favor over traditional sales taxes.

However, it is uncommon for sales taxes to be collected at every stage, as it is only levied as a final tax on the consumer, not the reseller.

Governance structure VAT is collected at the national level. In countries such as India and the United States, sales tax is collected at the point of sale by the local jurisdiction, leading them to prefer the latter method.

Accounting The main disadvantage of VAT is the extra accounting required by those in the supply chain. However, payment of VAT is made simpler when the VAT system has few, if any, exemptions (such as with GST in New Zealand).

Effects

Regressivity VAT has been criticized by opponents as a regressive tax, meaning that the poor pay more, as a percentage of their income, relative to the wealthier individuals, given the higher marginal propensity to consume among the poor.

Defenders reply that relating taxation levels to income is an arbitrary standard and that the VAT is in fact a proportional tax. An OECD study found that VAT could even be slightly progressive. VAT's effective regressivity can be reduced by applying a lower rate to products that are more likely to be consumed by the poor. Some countries compensate by implementing transfer payments targeted to the poor.Chia-Tern Huey Min (October 2004) GST in Singapore: Policy Rationale, Implementation Strategy & Technical Design, Singapore Ministry of Finance.

Deadweight loss The incidence of VAT may not fall entirely on consumers as traders tend to absorb VAT so as to maintain sales volumes. Conversely, not all cuts in VAT are passed on in lower prices. VAT consequently leads to a deadweight loss if cutting prices pushes a business below the margin of profitability. The effect can be seen when VAT is cut or abolished. Sweden reduced VAT on restaurant meals from 25% to 12%, creating 11,000 additional jobs.

Churning Because VAT is included in the price index to which state benefits such as pensions and welfare payments are linked in some countries, as well as public sector pay, some of the apparent revenue is churned – i.e. taxpayers are given the money to pay the tax, reducing net revenue.

Business cashflow Refund delays by the tax administration can damage businesses.

Compliance costs Compliance costs are seen as a burden on business. In the UK, compliance costs for VAT have been estimated to be about 4% of the yield, with greater impacts on smaller businesses.