value added tax


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value added tax
Value added tax (VAT) is a type of tax that businesses charge on the sale of their goods and services. The tax is calculated by adding up the value of the product or service at each stage of production, from raw materials to finished products. For example, if a business buys a raw material for $10 and then adds $5 of value to it before selling it for $20, then the tax would be calculated on the added value of $5. Here’s an analogy to help you understand. Imagine you have a lemonade stand. You start out with a bag of lemons that cost $10. You turn those lemons into lemonade and sell it for $20. The value added tax would be the difference between what you paid for the lemons and the price you sold the lemonade for, which is $10. Fun Fact: Value added tax is the most common type of consumption tax in the world. It is used in more than 160 countries.