Value Added Tax (VAT)

Each business in a chain charges VAT on its sales (output tax) and reclaims the VAT on its own purchases (input tax). It pays the authority only the net amount, so the full burden falls on the final consumer. Many countries use it, and some call it goods and services tax (GST). It differs from a plain retail sales tax, which is charged once at the final sale. Compliance work covers registration above a turnover threshold, correct invoices, choosing the right rate (standard, reduced, zero or exempt), periodic returns and record keeping. Cross-border supplies and e-commerce add complexity. Errors lead to penalties, and VAT fraud schemes such as carousel fraud exploit refund mechanisms. Because input tax is reclaimable, tax teams and auditors spend most of their effort on invoices and refund claims, where mistakes and fraud concentrate.

A furniture maker sells a table to a retailer for 1,000 plus 20% VAT. It paid 50 of VAT on timber and fittings. In its monthly return it reports 200 of output tax, deducts 50 of input tax and pays the authority 150. The retailer later charges its customer VAT on a higher price and reclaims the 200 it paid the maker.