A value-added tax (VAT) is an indirect tax on the consumption of goods and services. The value added to a product is computed at each stage of its production and the tax is added based on a proportion of this increase in value. The value-added tax is collected at the point of sale to the final customer; anyone involved in the production chain does not pay the tax. Some goods may be exempted from the VAT so that consumers will pay a lower price; this usually occurs for essential goods that are needed by lower-income people. Nonetheless, because the VAT is based on the amount of consumption, the tax burden tends to fall more heavily on lower-income people who must spend a larger proportion of their incomes on essential items.
The VAT is used by the countries in the European Union, as well as many other countries, because it is difficult for anyone to avoid paying the tax. Thus, tax revenue tends to be higher when the value-added tax is used.
The tax is not charged on export sales, which creates an incentive for producers to export goods. Foreign customers can typically apply for a refund of any VAT paid by them.