Conceptually a VAT adds a tax to each level in the production process in which value is added to a product.
For example, if you are making a widget then a company would buy the raw materials and then make the widget (step 1), and then another company would package it (step 2), and then anothet company would distribute it (step 3) and then another company would sell it (step 4). Each step along the way would be taxed (ie the distributor would pay a tax on their purchase from the packager, etc). This is in contrast to how it is typically done in America where all tax burden is placed on the point of sale.
The idea is the spread the tax burden across the entire process which decreases the tax burden on consumers and makes pricing more predictable and consistent.
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