Value Added Tax (VAT) is a type of indirect tax that is levied on goods and services at each stage of their production or distribution, whenever value is added. Essentially, VAT is a percentage-based tax, added to the sale price at different stages of the production and supply chain. Each business in the chain collects VAT on its sales and pays VAT on its purchases. Businesses can reclaim the VAT paid to their suppliers by offsetting it against the VAT collected from their customers, remitting the balance to the tax authorities.

For example, if a manufacturer sells products to a retailer, VAT is included in their sale price, and the retailer pays it. When the retailer sells to end consumers, the final price includes VAT based on the value added by the retailer. Unlike Sales Tax, which is levied only on the final sale to consumers, VAT applies to the entire supply chain.

VAT contributes significantly to government revenues and is implemented in many countries around the globe. Understanding VAT compliance is crucial for ensuring accurate financial reporting and maintaining tax obligations, making it an important consideration for businesses involved in balance sheet and financial operations. For organizations using Easy Month End, tracking VAT obligations might be part of their Month End processes, ensuring accurate financial closures and reconciliations.