How to Calculate the Hidden Tax: Value Added Tax Explained

April 11, 2024

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What is VAT?

VAT is a type of consumption tax levied on the "value added" to goods and services at each stage of production and distribution.

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How Does VAT Work?

 The manufacturer adds another VAT when they transform it into a t-shirt. Finally, the store adds a final VAT when you buy it. Each VAT is based on the increase in value at that stage.

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Who Pays VAT?

Consumers like you pay VAT when you purchase final goods and services. Businesses simply act as collectors and remitters for the government.

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VAT Rates Around the World

VAT rates vary depending on the country. In Europe, for example, the standard VAT rate ranges from 17% to 27%. Some countries have lower or even zero VAT rates for essential goods like food.

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VAT vs. Sales Tax

VAT and sales tax are both consumption taxes, but they differ slightly. VAT is applied throughout the supply chain, while sales tax is typically added at the final point of sale.

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