What Is VAT?

VAT in one paragraph

VAT stands for Value Added Tax. It is a tax on consumption, added to the price of most goods and services and charged at each stage of the supply chain. Businesses collect it from their customers and pay it over to the government, but they can deduct the VAT they paid on their own purchases. That means only the value added at each stage is taxed, and the final consumer bears the whole cost.

VAT is the main consumption tax in most of the world. Some countries call the same kind of tax GST (Goods and Services Tax), including Australia, Canada, India, New Zealand and Singapore. The United States is the best-known exception: it has no federal VAT and uses state sales taxes instead.

A furniture maker buys wood, turns it into a table and sells it to a shop, which sells it to a customer. The figures are illustrative.

The customer pays 480.00, which is 400.00 plus 80.00 of VAT. The tax authority also receives exactly 80.00, collected in three instalments. Each business hands over VAT only on the value it added: 100 + 150 + 150 = 400 of value, taxed at 20%.

This staged collection is what separates VAT from a retail sales tax. If one business in the chain fails to pay, the tax collected at the earlier stages has already been received. For a side-by-side comparison, see VAT vs GST vs sales tax.

Adding VAT to a net price

VAT = net price × VAT rate. To get the gross price, multiply the net price by (1 + rate). At 20%, a net price of 100 becomes 100 × 1.20 = 120.

Removing VAT from a gross price

Net price = gross price ÷ (1 + rate). At 20%, a gross price of 120 gives 120 ÷ 1.20 = 100, so the VAT is 20.

A common mistake is to take 20% off the gross price. On 120, that gives 24 of VAT rather than the correct 20, because the rate applies to the net price and not to the VAT-inclusive total.

The VAT calculator does both, at any country's rates or a custom rate.

There is no worldwide VAT rate. Each country sets its own, and most use several:

• Standard rate: the default for anything without a special rule. Across the 60 countries on this site it runs from 5% to 27%.
• Reduced rates: lower rates for items such as food, books, medicines, public transport or hotels. See VAT on food by country for a common example.
• Zero rate: VAT is charged at 0%, and the seller can still reclaim VAT on its costs. Exports are usually zero-rated.
• Exempt: no VAT is charged, but the seller generally cannot reclaim VAT on related costs. Health, education, insurance and most financial services are commonly exempt.

The difference between zero-rated and exempt matters to businesses, even though the customer sees no VAT in either case. To look up a specific country, use the VAT rates by country table, or see the highest and lowest VAT rates in the world.

• Consumers pay VAT in the price of what they buy and cannot reclaim it, apart from tourist refund schemes in some countries. See VAT refunds for tourists and businesses.
• VAT-registered businesses charge VAT on their sales, deduct VAT on their purchases and pay the difference to the tax authority. If they paid more than they charged, they can usually claim the difference back.
• Small businesses below the local threshold often do not have to register. Thresholds vary widely by country: see VAT registration thresholds by country.
• Exempt businesses, such as many banks and insurers, charge no VAT on exempt sales, so they cannot reclaim most of the VAT on their costs.

Registered businesses must issue valid invoices and file regular returns. See what must appear on a VAT invoice and VAT number formats by country.

VAT is generally a destination-based tax: it is due where the goods or services are consumed. Exports are usually zero-rated, and imports are taxed on arrival. Two rules cover most cross-border situations:

• Business to business: the buyer often accounts for the VAT in place of the seller, under the reverse charge mechanism.
• Business to consumer: sellers of digital services and some goods may have to charge VAT in the customer's country. In the EU this can be reported through the One-Stop Shop. See VAT on digital services.

France introduced the first national VAT in 1954, developed by the French tax official Maurice Lauré. The European Economic Community adopted VAT as its common system through the First and Second VAT Directives in 1967. Membership of the EU still requires a VAT, with a standard rate of at least 15%.

The tax then spread worldwide, and more than 170 countries now use a VAT or GST. A small number have none: see countries with no VAT.

What does VAT stand for?

VAT stands for Value Added Tax. It is a consumption tax charged on most goods and services at each stage of the supply chain.

What is VAT in simple terms?

VAT is a tax added to the price of most things you buy. Shops and other businesses collect it for the government, and they can deduct the VAT they paid on their own purchases, so the final consumer bears the cost.

What is the VAT rate?

It depends on the country. Standard rates across the 60 countries on this site run from 5% to 27%, and most countries also have reduced rates for items such as food.

Is VAT the same as sales tax?

No. VAT is collected at every stage of the supply chain, with businesses deducting VAT on their costs. A retail sales tax is charged only on the final sale to the consumer.

Is GST the same as VAT?

In most countries, yes in practice. GST is the name several countries, including Australia, Canada, New Zealand and Singapore, use for a tax that works in much the same way as VAT.

Does the United States have VAT?

No. The United States has no federal VAT. Most states charge a retail sales tax instead.