The real genius behind VAT is that it isn’t just applied to transactions between business and consumer, but to all transactions. The rule is normally very simple, it’s applied to all transactions, with few exceptions. The rate can vary, but those rules are also usually very simple. The trick is: When a business has a transaction with another business, VAT is still applied, but the selling party has to levy the tax and forward it to the government and the purchasing party can ask the government to give back the tax they paid on the transaction.

This may seem a bit convoluted, where the tax goes through the government only to end up back in the business. But this ensures the tax is applied always. Normally a profitable company would sell their products for more than the components they purchased. The difference between these two is the value added. And by getting back less from the purchases as what they have to pay for sales, the tax is only applied to the value added. And for consumers it functions as a sales tax, being applied to all transactions and no way around it.

This system is way harder to mess with than any other form of sales tax. The rules are simple with few exceptions and thus very easy to reinforce. It’s also a more fair system, where each party in the chain pays a part instead of the consumer paying for all of it.

In the end the consumer pays most, but as the taxes are supposed to be used to make their lives better, it seems like a fair deal? Now if you have a government that’s more about filling their own pockets than actually doing what they need to do to improve the lives of the people living there, well then you are going to have a bad day. But that doesn’t happen in civilized countries right?