How does VAT impact the final price of a product?

Value Added Tax (VAT) is a consumption tax that is applied at each stage of the production and distribution process, which means that it accumulates with each step a product takes from raw materials to the final consumer. This tax is ultimately reflected in the final price paid by the consumer. When producers and retailers add VAT to the selling price at each stage, they collect this tax on behalf of the government, which is why it becomes a part of the final cost of goods.

This mechanism ensures that the burden of the tax is shared throughout the supply chain, rather than being borne by the final consumer alone at the point of sale, which is a significant characteristic distinguishing VAT from other types of sales tax. Thus, the effect of VAT on pricing is profound, as each stage of the transaction contributes to a cumulative total that increases the final price of the product.