VAT is an abbreviation for the term Value-Added Tax. It is an indirect tax on the consumption of goods and services in the economy. Revenue is raised for government by requiring certain traders (vendors), that carry on an enterprise to register for VAT.
Subject to certain conditions, the vendor must then charge VAT on supplies of goods and services made by it (output tax). VAT is only charged on taxable supplies made. Taxable supplies are supplies for which VAT is charged at either the standard rate (currently 15%) or zero rate (0%). There is a limited range of goods and services which are subject to VAT at the zero rate or exempt from VAT.
The vendor will also be entitled to deduct VAT charged to it (input tax) when incurred for making taxable supplies. Under limited circumstances a vendor may claim a deduction (notional input tax) on a supply made to it by a business that is not registered for VAT.
VAT is non-cumulative, meaning that a credit/deduction is allowed for VAT paid in previous stages, within the production and distribution chain. The vendor is required to pay the difference between the output tax and the input tax or claim a VAT refund where the input tax exceeds the output tax.
VAT is therefore, charged at each stage of the production and distribution process and it is proportional to the price charged for the goods and services. VAT is also payable on the importation of goods and on imported services.