Meaning of VAT
Value Added Tax (VAT), in some countries also known as Goods & Service Tax (GST). It may be perceived as a tax on consumption means "if a person is purchasing more goods then he will be liable to pay more tax". From this definition, it is quite clear that everyone who purchases goods and services is responsible to pay tax to the government.

Example
Here, we are giving best illustration for the better understanding of VAT.

If a farmer selling wood to the carpenter & charging Rs. 10,000 for his own wood plus VAT 12.5% . The VAT on this would be 1,250. Therefore, the carpenter would pay to the farmer Rs 11250. Of this amount, the farmer would pay to the government Rs 1250 & will retain Rs 10,000.

The carpenter can get back from the government Rs. 1250 so the wood only cost Rs 10,000. Once the goods are made he/she would sell some of the towels to a shop for Rs. 100 plus VAT of Rs. 12.50. The Rs. 12.50 is paid over the government.

The shop would reclaim the Rs 12.50 from the government and sell a good for Rs. 10 plus VAT of Rs. 1.00. The Rs 1.00 is paid to the government.

The end consumer pays Rs. 12.50 for the goods, of which Rs 1.75 is tax. He/she is not entitled to reclaim this amount and the government gets to keep the cash.