Harold Hallikainen wrote:

> Does VAT stand for Value Added Tax? 

Yes.

> How does this work with a chain of suppliers, each adding some value?

Extremely simple. If you sell something (professionally, doesn't matter
whether product or service, and doesn't matter whether to businesses or
final consumers), you need to collect VAT on top of that. This VAT has to
be spelled out in the invoice. The VAT that you have to pay to the
government is the balance of collected (through sales) and paid (through
purchases) VAT. 

The advantage is that there's no tax exemption and the associated
bureaucratic overhead (but creating the same effect, and better), and
there's no difference between buying something for resale and buying
something for use (in business). For both you pay VAT, and for both you
discount that paid VAT against the VAT you collect when you sell.

In the end, who pays it all is the final consumer (like with all taxes,
more or less covert); that is in this case the last in the chain who can
not deduct the paid VAT from collected VAT. And what this last one pays
gets passed on to the government by everybody who added to the final sales
value of the product or service, in the proportion they contributed to it.

There are of course the exceptions to the rule... for example, basic items
like food are exempt, and books only pay half the rate (in Germany at
least; I suspect it's similar but different in the details in other
countries).


IMO this system makes more sense than the sales tax system, as it is
simpler and more logical and involves less administrative overhead. 

Gerhard

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