How is VAT categorized in the tax system?

Value Added Tax (VAT) is categorized as a consumption tax, which means it is levied on the sale of goods and services. The key characteristic of a consumption tax is that it is paid by the end consumer rather than businesses in the supply chain. This aligns with the nature of VAT, which is charged at each stage of production and distribution, but ultimately borne by the final consumer when they purchase the product or service.

In a consumption tax system like VAT, businesses that are part of the supply chain can reclaim the VAT they have paid on their inputs, ensuring that the tax is effectively only imposed on the value added at each stage, leading to a final tax cost that reflects consumer spending. This structure is designed to avoid double taxation and maintain fairness across different sectors.

In contrast, other tax categories mentioned do not align with the defining characteristics of VAT. For example, a turnover tax is generally based on total sales without deductions for costs, making it different from VAT. Income tax is based on an individual's or business's earnings and is unrelated to consumption. Capital gains tax is specifically applicable to the profits earned from the sale of assets and does not cover standard goods and services transactions. Thus, the classification of VAT as a consumption tax is accurate and fundamental