Value Added Tax (VAT)

Value Added Tax (VAT)

Value Added Tax (VAT) is a consumption tax levied at each stage of the production and distribution chain, based on the value added at each stage. Unlike a simple sales tax collected only at the final point of sale, VAT is collected incrementally throughout the supply chain — but the tax burden ultimately falls on the end consumer.

Over 160 countries use VAT, including all EU member states, the UK, Canada (as GST/HST), Australia (as GST), and most of the developing world. The United States is notable for not having a federal VAT, instead relying on state and local sales taxes.

How VAT Works

Each business in the supply chain:

1. Charges VAT on their sales (output VAT)
2. Deducts the VAT they paid on purchases (input VAT)
3. Remits the difference to the government

This mechanism means each business only pays VAT on the value they added — hence the name.

Example (20% VAT):

| Stage | Sale Price | VAT Charged | VAT Paid on Inputs | Net VAT Paid to Government | |-------|-----------|-------------|-------------------|---------------------------| | Manufacturer sells raw goods | $100 | $20 | $0 | $20 | | Wholesaler adds value, sells | $150 | $30 | $20 | $10 | | Retailer adds value, sells | $200 | $40 | $30 | $10 | | Consumer pays total | $200 | $40 | — | $40 total collected |

The consumer pays $40 in VAT regardless of how many supply chain steps exist.

VAT Rates by Country (2024)

| Country | Standard VAT Rate | |---------|------------------| | Hungary | 27% | | Denmark, Sweden, Norway | 25% | | Finland | 24% | | United Kingdom | 20% | | France, Germany, Italy | 20% / 19% / 22% | | Australia (GST) | 10% | | Canada (GST) | 5% (plus provincial) | | Japan (consumption tax) | 10% |

Including vs. Excluding VAT

When calculating prices:

Price including VAT:

Price incl. VAT = Net Price × (1 + VAT Rate)

Price excluding VAT (stripping out):

Net Price = Price incl. VAT ÷ (1 + VAT Rate)

For a $120 price at 20% VAT: Net price = $120 / 1.20 = $100

Related Tools

• VAT Calculator — Instantly add or remove VAT from any price
• ROI Calculator — Calculate returns on business investments including VAT implications