The European Union Value Added Tax (EU VAT) is a general tax. It’s levied on most goods and services that are traded for consumption within the EU.

It is applied, when a VAT registered business sells goods or services to another business or to a consumer based in EU. “Value added” in VAT refers to the amount by which the value of a product is increased at each stage of production and distribution.

Also, VAT is an indirect consumption tax, because it is paid ultimately by the consumer and turns out to be neutral for VAT registered businesses.

When businesses pay the revenue authorities, they deduct VAT that they've paid on purchases used in production of goods from the VAT that they've charged on their sales.

Here's an example to illustrate how the process works -