VAT = Value Added Tax When the input cost of something increases in the supply chain (prior to sale to consumer), the buyer doesn't pay VAT on the input. So i

VAT = Value Added Tax When the input cost of something increases in the supply chain (prior to sale to consumer), the buyer doesn't pay VAT on the input. So if the input costs $10, and there is s 25% VAT, the buyer pays $12.50, but then gets a credit for the $2.50 VAT they paid. When the buyer does their thing to add value, and sell to the next person in the chain, they charge VAT on the sale prices. Say the value add is $10, and they sell for $20 + $5 VAT. When they go to pay VAT to the government their payment is only the difference between the input VAT payment, and the output VAT collected, in this case $5-$2.50=$2.50 goes to government. If the input goes up to $16, they pay $4 input VAT. If they still add $10, their sale prices is $26, with $6.50 VAT. The amount that goes to the government is $6.50-$4 = $2.50 The VAT doesn't compound.