VAT (Value Added Tax) is a consumption tax applied at each stage of the supply chain. The end consumer pays the full VAT — businesses collect it on behalf of the government. VAT rates vary significantly by country, from around 5% in some places to over 25% in others.
Adding VAT: Multiply the base price by (1 + rate/100). Example: $100 + 20% VAT = $100 × 1.20 = $120.
Extracting VAT from a VAT-inclusive price: Divide the total by (1 + rate/100). Example: $120 ÷ 1.20 = $100 base, $20 VAT.
Frequently asked questions
What is the difference between VAT and sales tax?
Both are consumption taxes, but they work differently. VAT is collected at every stage of production — manufacturers, wholesalers, and retailers all pay VAT but can reclaim what they paid to suppliers. Sales tax is only collected once, at the point of final sale to the consumer. The US uses sales tax; most of the rest of the world uses VAT.
Are prices in stores shown with or without VAT?
In most countries that use VAT (UK, EU, Latin America), prices shown to consumers already include VAT. Business-to-business prices are often quoted excluding VAT. In the US, prices are shown excluding sales tax, which is added at checkout.
Can businesses reclaim VAT?
Yes — VAT-registered businesses can generally reclaim the VAT they pay on business purchases (input VAT) by offsetting it against the VAT they charge customers (output VAT). They only pay the net difference to the tax authority. This is one of the key features that distinguishes VAT from sales tax.