I am living in Norway and the VAT System is like this:
if I have a VAT registrered company then I must charge 25% VAT on all my bills, and these 25% I must pay to Government every second month. I can however deduct all 25% VAT on incoming goods.
If I am a pencil producer and buy lead for say 50USD, then I must pay 62.5 USD to the lead manifacturer.
If I plan to sell each pencil for say 1 USD, then I must sell them for 1.25 USD to the shop.
If I sell like 100 pencils, then I have to pay government 25 USD, but I can deduct 12.5 USD which was the VAT for the lead, thsat means my VAT expenses was 12.5 USD.
The end purchaser will have to pay whatever retail price the shopkeeper takes. If the pencil cost 2 USD, then he will have to pay 2.5 USD for a pencil. If the shopkeeper sell 100 pencils, then he will have to pay 50 USD - 25 USD = 25 USD.
The VAT regime is very much stricter than normal tax. Thats because government think its their money. They are more polite and slow getting income tax (done at community level). But the VAT you must be very sure to pay on time, because you get horrible fines and delay charges. The penalties for VAT evation is stricter than other types of tax crimes.