VAT stands for “Value-Added Tax.” It’s a consumption tax that applies to goods and services at each stage of the production and distribution chain. Unlike sales tax, which is typically charged only at the final point of sale to the consumer, VAT is collected incrementally at each step where value is added. In practice, businesses charge VAT to their customers and then remit it to the tax authorities, but they can also reclaim the VAT they’ve paid on their own purchases. This system helps prevent double taxation and ensures a consistent application of tax throughout the supply chain.
For non-Japanese enterprises dealing with Japan, understanding VAT is crucial because it affects pricing, compliance, and overall business strategy.