Value added tax (VAT) is the consumption tax actually paid by the final consumer when purchasing goods or receiving services. VAT is neutral to entrepreneurs. The VAT system states that entrepreneurs are the ones who, when supplying goods or providing services, collect the amount of VAT from final customers and contribute it to the State budget. The neutrality of the VAT system is ensured by the institute for deducting input tax, with the result that VAT is actually applied to the difference between the 'added value' that arises at each stage of production and distribution.

The application of VAT at the European Union level is harmonised and is laid down in Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (VAT Directive). In Latvia, the application of VAT has been determined by the Value Added Tax Law since 1 January 2013.