How does a value added tax work?

A value-added tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. Businesses charge VAT on their sales and can deduct the VAT they paid on their purchases, effectively taxing only the value they add. This system allows for tax collection at multiple points in the supply chain, encouraging transparency and reducing tax evasion. Ultimately, the final consumer bears the VAT cost, as businesses pass on the tax in the price of goods and services.