A value added tax (VAT) is a form of consumption tax.

From the perspective of the

buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the
"value added" to a product, material or service, from an accounting view, by his stage of
its manufacture or distribution. The buyer remits to the government the difference
between these two amounts, and retains the rest for themselves to offset the taxes he had
previously paid on the inputs.

The "value added" to a product by a business is the sale price charged to its customer,
minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that
ultimately only the end consumer is taxed.[citation needed] It differs from the sales tax in that,
with the latter, the tax is collected and remitted to the government only once, at the point
of purchase by the end consumer. With the VAT, collections, remittances to the
government, and credits for taxes already paid occur each time a business in the supply
chain purchases products from another business.

Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des
impôts, was first to introduce VAT on April 10, 1954, although German industrialist Dr.
Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses,
it was extended over time to include all business sectors. In France, it is the most
important source of state finance, accounting for nearly 50% of state revenues.[1]

Personal end-consumers of products and services cannot recover VAT on purchases, but
businesses are able to recover VAT (input tax) on the products and services that they buy
in order to produce further goods or services that will be sold to yet another business in
the supply chain or directly to a final consumer. In this way, the total tax levied at each
stage in the economic chain of supply is a constant fraction of the value added by a
business to its products, and most of the cost of collecting the tax is borne by business,
rather than by the state. Value Added Taxes were introduced in part because they create
stronger incentives to collect than a sales tax does. Both types of consumption tax create
an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer
a mechanism to avoid or evade the tax—persuade the seller that he is not really an end
consumer, and therefore the seller is not legally required to collect it. The burden of
determining whether the buyer's motivation is to consume or re-sell is on the seller, but
the seller has no direct economic incentive to the seller to collect it. The VAT approach
gives sellers a direct financial stake in collecting the tax, and eliminates the problematic
decision by the seller about whether the buyer is or is not an end consumer.

Value added tax or VAT is an indirect tax, which is imposed on goods and
services at each stage of production, starting from raw materials to final product.
VAT is levied on the value additions at different stages of production. VAT is
widely applied in the European countries. However, now a number of countries
across the globe have adopted this tax system.

VAT was first introduced in France as taxe sur la valeur ajoutee or TVA. In 1954,
the French economist, Maurice Laure, the joint director of the French tax
authority, the Direction generale des impost, initiated the concept of VAT, which
came into effect on April 10, 1954. Initially introduced for large businesses of
France, with the passage of time, VAT was employed for all business sectors of
the country. In France, value added tax is considered to be one of the major
sources state finance.

Value added tax, also known as goods and services tax or GST proves to be
beneficial for the government. Through implementation of this tax system,
government can raise revenues invisibly, where the tax is not shown on the bill
paid by the buyer. VAT is different from sales tax in various aspects. While sales
tax is to be paid on the total value of the goods and services, VAT is levied on
every exchange of the product, so that consumers do not have to carry the total
cost of tax. However, VAT is generally not applied on export goods to avoid
double taxation on the final product. However, if VAT is charged on export goods,
the tax amount is usually refunded to the tax payer.