Quote:
Originally Posted by Nate the great
The standard way to implement a VAT is to say a business owes some percentage on the price of the product minus all taxes previously paid on the good. If VAT rates were 10%, an orange juice maker would pay 10% of the $5 per gallon price ($0.50) minus taxes previously paid by the orange farmer (maybe $0.20). In this example, the orange juice maker would have a $0.30 tax liability. Each business has a strong incentive for its suppliers to pay their taxes, allowing VAT rates to be higher with less tax evasion than a retail sales tax.
from:
http://en.wikipedia.org/wiki/Value_added_tax |
That's correct. VAT is only paid on the value that you "add" to the product - hence the name.
If you buy widgets wholesale at $10 and sell them retail for $15, you (the seller) only pay VAT on the $5 between the buying and selling price.
The way it works in practice is that, right the way up the "chain" from the manufacturer to the retailer, each person
pays to the government the VAT that they charge to the person they've sold the item to, and
reclaims from the government the VAT on the money they've paid to their supplier. The net result is that everyone pays VAT on the
difference between their purchase and selling price for an item.
It's a lot easier in reality than that probably makes it sound
.