What is the primary purpose of VAT?

The primary purpose of VAT, or Value Added Tax, is to collect tax on the value added at each stage of production and distribution. This means that VAT is charged on the difference between the cost of inputs and the selling price of outputs throughout the supply chain. As goods and services move from producers to consumers, each business in the chain adds value and is responsible for collecting VAT on that additional value it contributes.

When a business sells a product, it adds a certain amount of value that is then subject to VAT. This system ensures that tax is levied incrementally at each point of sale without being double taxed on the total cost of the product. The collected VAT from consumers is then passed on to the government, creating a transparent tax process that supports public services.

In contrast, the other options do not accurately reflect the core function of VAT. Tax on profits pertains more to Corporation Tax, while a flat rate on sales does not encapsulate the idea of value added at multiple stages. Tax on imports usually relates to customs duties rather than VAT itself, which is applicable to the domestic sales of goods and services. Therefore, the purpose of VAT emphasizes its role in the value-added chain rather than focusing solely on profits, imports, or a flat sales tax