Value-added tax is charged at each stage of production and distribution, with the final burden normally falling on consumers.
VAT is a consumption tax. Businesses charge VAT on taxable sales and generally deduct the VAT they paid on business inputs. They then remit the difference to the tax authority. This input-credit system taxes the value added at each stage rather than repeatedly taxing the full selling price.
France introduced the modern VAT in 1954, and the system later spread widely. The European Union requires member states to operate VAT systems, although countries set their own rates within EU rules. Basic food, health care, education, or exports may receive exemptions or zero rates depending on national law.
VAT is often confused with a retail sales tax. A retail sales tax is normally collected only at the final sale, while VAT is collected and documented throughout the supply chain. In either system, businesses may act as tax collectors even when consumers bear the economic cost.