Among hundreds of taxes used in the finance world today, Value Added Tax (VAT) plays a critical and important role in taxation. This is due to the interaction it has with the end consumers. Whenever we by goods and services, we pay some percentage of tax as VAT. VAT is a taxation adopted and implemented by many countries of the world. Due to the vast usage of VAT, sometimes, end consumers are ripped off by various parties including governments and middle-men of businesses.

VAT or GST (Goods and services tax) is tax on exchanges. Imagine a scenario where a particular consumer item is being produced by one party and then bought by another party for further enhancement and then sold to the end customer. Then the end customer should be charged VAT only for the value added by the second party; not for the total value of the good. But, in practice, this is not the usual case. Usually VAT is charged for the total value of the goods or service from the end customer. This is a violation of tax laws as there is a separate tax called sales tax which has the same effect. Sales tax is levied on the total value of the exchange. Ideally VAT should be neutral with respect to the number of passages between the producer and the end customer.

VAT is called an indirect tax where the consumer is not charged for the entire cost of the goods and services. The main issue related to VAT is the double taxation. To avoid this, exports are not taxed for VAT and in case they are taxed, it is refundable. There are heavy criticisms against VAT calling it a regressive tax, which has the effect of the poor paying more compared to the rich. The main factor is that when VAT is calculated for an exchange, end customer’s income is not considered; only the spending is considered. Therefore, the taxation is the same whether you earn less or high. However, usually the government revenue from VAT is less than expected due to difficulties of administration and collection.