How VAT Works
Value Added Tax is a multi-stage consumption tax applied to goods and services. Unlike sales tax (charged only at the final sale), VAT is collected at every step of production and distribution. Businesses charge VAT on sales (output VAT) and reclaim VAT on purchases (input VAT), remitting only the difference to the government.
VAT Formulas
- Add VAT: Gross Price = Net Price × (1 + VAT Rate / 100)
- Remove VAT: Net Price = Gross Price ÷ (1 + VAT Rate / 100)
- Tax Amount: VAT = Net Price × (VAT Rate / 100)
- Find VAT Rate: Rate = (Tax Amount / Net Price) × 100
Example
A product costs $850 net with a 15% VAT rate:
- VAT Amount: $850 × 0.15 = $127.50
- Gross Price: $850 + $127.50 = $977.50
- Reverse: $977.50 ÷ 1.15 = $850 (net price)
VAT Rates by Country
| Country | Standard Rate | Reduced Rate(s) |
|---|---|---|
| United Kingdom | 20% | 5%, 0% |
| Germany | 19% | 7% |
| France | 20% | 10%, 5.5%, 2.1% |
| Italy | 22% | 10%, 5%, 4% |
| Spain | 21% | 10%, 4% |
| Netherlands | 21% | 9% |
| Sweden | 25% | 12%, 6% |
| Norway | 25% | 15%, 12% |
| Canada (GST) | 5% | — |
| Australia (GST) | 10% | — |
| Japan | 10% | 8% |
| India (GST) | 18% | 12%, 5%, 0% |
| South Africa | 15% | — |
| Brazil | 17-20% | Varies by state |
VAT vs Sales Tax
The key difference is where tax is collected. VAT is charged at every stage of production — raw materials, manufacturing, wholesale, retail — with each business remitting only the VAT on the value it added. Sales tax is a single-stage tax charged only at the final purchase.
This makes VAT self-enforcing: each buyer in the chain has an incentive to ensure their supplier properly reported VAT, since they need the invoice to claim input credits.
VAT-Inclusive vs VAT-Exclusive Pricing
In most VAT countries, displayed prices include VAT for consumer purchases (B2C). Business-to-business (B2B) transactions often show net prices with VAT listed separately. This contrasts with the US, where sales tax is added at checkout.