value-added tax (VAT) business definition

A tax levied on increases in a product's value at each stage of production and distribution. The value-added tax, essentially an invisible sales tax included in the final price, is ultimately paid by consumers. For example, a candy maker paying $10,000 for ingredients used in the manufacture of chocolate bars that are resold for $15,000 would be required to pay a tax on the $5,000 of value added to the product. Proponents argue that substituting the value-added tax for the current federal income tax would stimulate consumer saving. Compare consumption tax.