VAT is an indirect tax which is imposed on selected goods and services that are bought and sold by businesses. VAT is implemented in more than 160 countries around the world. VAT is a tax on consumption that is paid and collected at every stage of the supply chain, from when a manufacturer purchases raw materials to when a retailer sells the end-product to a consumer. Unlike with other taxes, eligible businesses will both:
When a VAT-registered business sells a good or service, it charges – assuming a standard case – an extra 5% of VAT on top of the sales price. The business will account for that 5% from all eligible sales separately from its revenue in order to later remit a portion of it to the government. The VAT that a business collects on its sales is called Output VAT. That same business will also pay 5% VAT on top of the goods or services purchased from other taxable businesses. The VAT that a business pays to its suppliers is called Input VAT. In order to calculate how much they owe to government, each business will note how much VAT it has collected from customers and subtract from it the total VAT it paid in the same period.