Value Added Tax (VAT) is a type of consumption tax that is charged on the value added to a product or service at each stage of production and distribution. [Consumption tax is a tax on goods and services consumed by individuals or businesses. Value added refers to the increase in value of a product or service at each stage of production.]
For example, let’s say a company manufactures a shirt. The company buys raw materials like fabric and buttons from suppliers. The company then adds value to these materials by cutting, sewing, and adding design elements. Finally, the company sells the finished shirt to a retailer. At each stage of production and distribution, VAT is charged based on the value that was added to the product. So, the supplier charges VAT when selling raw materials to the company, the company charges VAT when selling the shirt to the retailer, and the retailer charges VAT when selling the shirt to the customer.
Very Simple Definition:
VAT is a tax added to the price of things we buy. For example, if you buy a toy, you might pay extra money on top of its price as VAT.