A multistage tax collected at each stage a product is sold.
Raw materials go through several stages before they become finished products. Then, they are distributed to the retailers before being purchased by the end users. At each and every one of these stages, the product not only gains more value but also often changes hands.
Each seller in the chain collects from its customer the value-added tax on behalf of the government, and pays it to the government after deducting from it the V.A.T. amount it paid when purchasing it in the first place. For example, if a distribution company purchases a product for $10 from a manufacturer, and sells it to a retailer for $15, it collects V.A.T. on the amount of $15 from the retailer, and before paying it to the government, he deducts the V.A.T. it paid to the manufacturer on his purchasing price of $10. Therefore, in the end, it comes to pay V.A.T. only on its own added-value, which is $15 minus $10.
Also see:· value-added