Value added tax is a tax on the difference between the purchase price of the inputs and the sale price of the outputs; that is, it's a tax on the value that company specifically adds.
The way it works in practice is VAT is added to the the sale price, but the VAT actually sent by the business to the government is reduced by any VAT that was paid for inputs. This way, you don't end up with increasing amounts of tax just because a supply chain has lots of middlemen.
This setup creates an incentive to report VAT at each level of the supply chain, reducing fraud. Because the tax doesn't compound with multiple steps, it's fairer.
The way it works in practice is VAT is added to the the sale price, but the VAT actually sent by the business to the government is reduced by any VAT that was paid for inputs. This way, you don't end up with increasing amounts of tax just because a supply chain has lots of middlemen.
This setup creates an incentive to report VAT at each level of the supply chain, reducing fraud. Because the tax doesn't compound with multiple steps, it's fairer.