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Value Added Tax

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A value added tax is sometimes referred to as VAT. A value added tax is added to the price of a product at each stage of its manufacture or distribution. As more "value" is added to a product, value added tax, based on a percentage of the increased value, is paid. For example, a log would be subject to value added tax based on the price paid by the lumber mill. Finished lumber made from the wood has the value added tax applied based on the added cost of milling. A table fabricated from that lumber would have more added value and another percentage of value added tax. The difference between the cost of the lumber and the table would be subject to the value added tax. The value added tax might be applied to services such as a doctor's fee. Value added tax could also be paid on the electricity distributed by a utility company. Ultimately, a value added tax is a sales tax that is paid by the end consumer of the good or service.



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