Legal Definitions - VAT

VAT stands for Value-Added Tax.

It is a type of consumption tax levied on goods and services at each stage of their production and distribution. Businesses add VAT to the price of their products or services, collect it from their customers, and then pay it to the government. While businesses are responsible for collecting and remitting the tax, the ultimate financial burden of VAT typically falls on the final consumer.

• Example 1: Purchasing a new appliance

  Imagine you buy a new refrigerator from an appliance store. The price you see on the tag, or the total amount on your receipt, will include VAT. The store adds this tax to the base price of the refrigerator, collects it from you at the point of sale, and then periodically remits the collected VAT to the government. You, as the final consumer, pay the VAT as part of the purchase price.

• Example 2: A manufacturing process

  Consider a clothing company that buys fabric from a textile supplier. The supplier charges VAT on the fabric. The clothing company then uses this fabric to produce shirts. When the clothing company sells these finished shirts to a retail store, they add VAT to the price of the shirts. The clothing company pays VAT on the fabric (known as "input VAT") and charges VAT on the shirts ("output VAT"). They then remit to the government only the difference between the output VAT and the input VAT, effectively paying tax only on the value they added through manufacturing the shirts.

• Example 3: Engaging professional services

  If you hire a graphic designer to create a new logo for your business, their invoice will typically include a charge for VAT on top of their service fee. You pay the graphic designer the total amount, including the VAT. The graphic designer then collects this VAT from you and is responsible for paying it to the relevant tax authority. This demonstrates how VAT applies to services as well as physical goods.