Value Added Tax (VAT), known as Impuesto al Valor Agregado (IVA) in Mexico, is an indirect tax levied on most goods and services. This consumption tax is applied at each stage of the production and distribution chain, with the end consumer ultimately bearing the burden. For example, when a business purchases raw materials, it pays IVA on those materials. The business then charges IVA on its finished product, but can deduct the IVA it already paid on the raw materials. The difference is remitted to the tax authorities.
This tax plays a significant role in government revenue, funding public services and infrastructure development. It offers a relatively stable and predictable source of income for the state. Historically, the introduction of this taxation system aimed to modernize the tax structure, shifting from a system heavily reliant on direct taxes to one that incorporates a broader base of consumption. This transition was intended to improve tax compliance and enhance the overall fairness and efficiency of the tax system. The standard rate and any reduced rates are important to understand for both businesses and consumers.
