A value-added tax (VAT) is a tax levied on the purchase of goods and services. The value added to a product is calculated at each stage of production, and the tax is levied based on a percentage of this increase in value. The value-added tax is collected at the point of sale to the final customer; anyone involved in the manufacturing process does not have to pay the tax. Some goods may be exempt from VAT in order for consumers to pay a lower price; this is typically done for essential goods that are required by low-income people. Nonetheless, because the VAT is based on the amount of consumption, the tax burden falls disproportionately on lower-income people who must spend a greater proportion of their income on necessities.
The VAT is used by the European Union and many other countries because it is difficult for anyone to avoid paying the tax. As a result, when the value-added tax is used, tax revenue tends to be higher.
The tax is not levied on export sales, which encourages producers to export goods. Foreign customers can usually apply for a refund of any VAT they have paid.