VAT is a system of collection of sales tax under which tax is charged at each stage of sale on the value added to the goods. In practice, the dealer selling the goods collects tax on the full price at which he sells the goods whether to a consumer or to a dealer. At the end of a tax period, usually a month, he reduces from the tax so collected by him, the tax which has been charged to him by the dealers from whom he purchased goods during the tax period and deposits the balance to the Government treasury.
Source: http://www.pextax.com
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