Which of the following defines VAT?

Value Added Tax (VAT) is a type of indirect tax that is levied at each stage of the supply chain, from production to the final sale. The key characteristic of VAT is that it is applied to the value added to goods and services at each stage of their production or distribution. This means that whenever a sale is made or a purchase occurs, VAT is charged on this transaction, reflecting the sales and purchases aspect.

Unlike a tax on income, which is directly assessed on the earnings of individuals or businesses, VAT operates differently by taxing consumption rather than income. Furthermore, it is not related to capital gains; that tax applies to the profits made from the sale of certain assets. Lastly, VAT is not classified as a fee for government services, which would typically involve charges for specific government-provided services rather than a percentage of sales transactions. Thus, the definition related to sales and purchases accurately captures the essence of how VAT operates in a taxation system.