1. Definition and characterization

1.3 The tax mechanism

We could hardly imagine a situation in which the activities of each consumer are being closely scrutinized by the tax authorities.  The state cannot monitor the overall final consumption.  Instead it tries to register all activities connected with the final consumption.

These connected activities are mainly:

These are some other activities which represent final consumption and do not fall into the above two categories.  Still, these activities should not be disregarded by the tax authorities.

VAT is a multi-phase tax, i.e. it is imposed at each stage of the production and realization of the goods and services, even when such deals do not lead to final consumption.

In such a case a reasonable question is: "Does VAT have a cumulative effect?"  The answer is: No. 

The system of imposition of VAT provides a mechanism for regular compensation for the VAT paid in previous stages - the tax credit mechanism.  The objective of this mechanism is to ensure that when a deal is not connected with the final consumption, the state budget will receive the money value of the tax from the seller and will return it in short time to the buyer, so that the end effect of the deal for the state budget is zero.

Tax income is realized only though deals which represent final and not transitional consumption.  This because the final consumer does not have the right of reimbursement of the tax paid (tax credit).