Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our US site. Select your regional site here:

Cascade Tax: Definition & Meaning

Updated: November 25, 2022

There are a number of different tax systems that are employed throughout the world.

The two classic forms of tax are the value-added tax (VAT) and goods and services tax (GST).

One form of taxation is the cascade tax.

But what exactly is the cascade tax? And how does it work in both the local and international markets?

Read on as we take a closer look at everything to do with cascading tax.

List IconTable of Contents


    • Cascade tax is a tax that is repeatedly imposed at each stage of a product’s supply chain journey.
    • The end price of a product is affected by the compounding tax on top of taxes. This ends up with a real tax rate that is higher than the official one.
    • Alternatives to the cascade tax include value-added tax (VAT) and goods and services tax (GST).

    What Is a Cascade Tax?

    A cascade tax refers to a system that inputs sales taxes on products at each successive stage in the supply chain. This is from raw material all the way through to consumer purchase. Each buyer throughout the supply chain pays a separate price based on its cost. This includes the tax or taxes that have been previously charged. 

    A cascade tax is also commonly known as a cascading tax. 

    Turn Tax Pains Into Tax Gains

    How Does a Cascade Tax Work?

    To put it simply, a cascade tax is a tax on top of a tax. A cascade tax works like a waterfall, meaning there is a compounding effect to this tax. Products that have multiple stages of production will incur more and more tax as it moves through the supply chain on their way to the end-user. This results in a real sales tax that is higher than the official sales tax rate. 

    Countries that have a cascade tax system can often struggle to stay competitive in foreign markets. This is mainly due to the fact that such a tax system often results in inflationary prices to make up for the high tax. Especially when compared to international competitors. 

    Let’s use the print magazine industry as an example. 

    This would start with a tree. The tree would be cut down by a logging company, then sold to a paper factory. The factory would put the wood through the process of pulping, flattening, drying, and cutting into sheets. 

    These sheets of paper are purchased by a printing company, which would then be hired by a literary company to print their magazine. These magazines would then be printed out in large batches and sold wholesale. The wholesaler would then sell to newsagents and other retail stores. These stores would then put them on sale for a consumer to buy them. 

    During each stage of these transfers of ownership, the product would be subject to a sales tax. The total cost of the whole transaction would be based on the business costs that have accumulated throughout this process. This would include the sum of all of the taxes that have been charged for each transaction that occurred. 

    It's Time For Owners To Own Tax Season

    Cascading Tax Effect

    Cascading tax has the effect where the final consumer will most likely have to pay for the tax burden. This is because the consistent tax charges result in an inflation of the price of the commodity in question.

    For this reason, the cascade tax has been replaced with the value-added tax in many countries, including:

    • Australia
    • Canada
    • China
    • India
    • Nigeria
    • European Union countries 

    Example of Cascade Tax

    Let’s say that Company X produces and distributes a product. The government charges a 2% cascade tax on all goods and services that Company X makes. Company X then sells a product for $1,000 for the tax-exclusive price of $1,020 to Buyer Y. This is $1,000 + the 2% tax. 

    Buyer Y then uses this product in the production of their own product, which they sell to Buyer X to make a profit of $2,000. Buyer Y would add the $2,000 to the amount that they used to buy the initial product, therefore arriving at $3,020. 

    They would then have to add their own cascade tax to this total, which would bring the amount to $3,080 – which is $3,020 + 2% tax. 

    After Buyer X purchases the product from Buyer Y, they find a buyer who wants to purchase the product, giving Buyer X a profit of $5,000. Once sold, Buyer X would add this profit to the $3,080 and add the 2% cascade tax – meaning the total price would be $8,242. 

    After this set of transactions, the government would have collected a total tax worth $242. This would give an effective tax rate of 3.025%.


    A cascade tax is a tax that is imposed on products at each successive stage in the supply chain. A cascade tax has the effect of inflating the final consumer price of the product. Alternatives to the cascade tax include value-added tax (VAT) and goods and services tax (GST).

    Save 40 Hours During Tax Season

    FAQs About Cascade Tax

    What Is Cascading Effect in VAT?

    A cascading effect is when there is a tax levied on a product or service at every stage of the sale. The tax that is levied on the value includes the tax that was paid by the previous buyer. This means that the consumer ends up paying tax on tax that was already paid. When it comes to VAT, no exemptions can be made under this system.

    What Is the Difference Between Cascading Effect and Double Taxation?

    The difference between cascading effect and double taxation is simple. Cascade tax is a tax levied on every step of the production and sale. This can be any number of stages, depending on the product. Whereas double taxation is where the income tax is applied two times on the same source. This limits the tax to only being paid twice.

    What Are Cascading Risks?

    The risk associated with cascade tax is that the final price of the product is inflated due to the tax. This price is passed on to the consumer, meaning that countries that employ this method can suffer in the international markets.


    553 HRS


    $ 7000




    Try It Free for 30 Days. No credit card required. Cancel anytime.