What type of tax is Value Added Tax (VAT)?

Value Added Tax (VAT) is classified as an indirect tax on consumer spending. It is a tax applied to the sale of goods and services at each stage of production or distribution, where value is added. This means that VAT is not directly levied on individuals or businesses based on their income or wealth; instead, it is included in the final price consumers pay for products or services.

When a business sells a product, it adds VAT to the sales price. This tax is collected by the seller on behalf of the government and must be remitted to the tax authorities. Thus, consumers ultimately bear the cost of VAT when making purchases, while businesses act as intermediaries in the collection process.

Understanding VAT as an indirect tax highlights its role in the economy, as it affects consumption patterns and influences pricing strategies for businesses. This differentiates it from direct taxes, which target income or property rather than consumer transactions.