Vat an Overview
Value Added Tax (VAT) is a general consumption tax on goods and services, calculated by adding all costs involved in making and distributing goods or services, minus the amount that businesses can claim back during the production process for their "inputs": the raw materials, goods and services acquired in making the finished product. VAT is an indirect tax because the person who ultimately pays the tax is not necessarily the same person as the one who pays the tax to the tax authorities. The VAT is usually collected by the tax credit method; each firm applies the tax rate to its taxable sales, but is allowed a credit for value-added tax paid on its purchases of goods and services for business use, including the tax paid on purchases of capital equipment under a consumption-type value-added tax.
History
The VAT was invented by a French economist in 1954. In France, it is the most important source of state finance, accounting for approximately 45 percent of state revenues. West Germany adopted VAT in 1968, and subsequently most other Western European countries also implemented some form of VAT. Many countries in Africa, Asia, and South America have also followed suit.
