A value-added tax (VAT) is a popular way of implementing a consumption tax in Europe, Japan, and many other countries. The VAT is an alternative to a sales tax and is meant to deal with a specific problem. While with a sales tax, a business selling goods is responsible for making a subjective decision about the intent of a buyer, the business may not be fully competent to make the decision.

The refund portion of a VAT incentivizes accurate collection. If the buyer is a businessperson, then the VAT is a temporary payment to the state, based on the purchase price, eventually to be reimbursed by the state for the initial payment when the goods are resold, usually after adding value to them. Hence collecting the tax is a way to get money back. Consumers, with no possible refund, have no reason to inaccurately report their intended use.

The term "value added" refers to the sale price a business charges the customer for a product, minus the cost of materials and other taxable inputs.

A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that with the sales tax, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, on the other hand, collections, remittances to the government, and credits for taxes that are already paid occur each time a business in the supply chain purchases products.

VAT is currently applicable in the EU only. You can also check this linkfor further clarification: https://ec.europa.eu/taxation_customs/vies/faq.html .