A Value Added Tax or “Value-added” Tax is an acronym for VAT. It is a form of consumption tax which is collected ultimately from the final consumer on the purchase price. The Manufacturer or Dealer remits to the government Tax on "Value Added" for selling price over the produced or purchased material or services cost plus selling & other costs. So, the "Value Added" to a product or service by the Businessman is the sale price charged to its customer, from that of the seller, it is a Tax only on the "Value Added" to a product, material or service.
History of VAT
Actually the concept of VAT was planned by Mr. Wilhelm van Siemens in 1918. But it was came into light by Mr. Maurice Laure, the Joint Director for French Tax Authority. He make it into effect since April 10, 1954. Initially it was implemented over giant companies later on eventually it has been spread-ed to all over the business sector. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.
How VAT is Distributed in Different Stages
The final consumer of product or service can’t gain the recovery of VAT on Purchases, but Businessmen, Organizations, Companies, Government Bodies can get the recovery of VAT on the product or service that they buy in order to produce further goods or services that will be sold to yet another counterpart in the supply chain or directly to a personal end-consumer.
Tax in the concept of VAT is levied at each stage in the economic chain of supply of goods or services are the constant fraction of the valued added by a business, rather than by the state. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state.
Hence, with the VAT implementation every one ever gets profit over the purchase cost of the goods or services has to bear only a fraction of amount as VAT over the profit not on entire selling cost.