Why You Should Consider VAT in Your Product Pricing

With the advent of urbanization and globalization, entrepreneurs started sprouting across the globe. From small-scale market vendors to large multi-company conglomerates, selling has been one of the topmost business ventures of today. Selling internationally can offer great growth potential for a start-up business and can give you an edge over your competitors. It can also offer ways to diversify your business.

However, international selling can be a little bit complicated than the local one. One of the main factors to consider in selling is how to deal with taxes, especially value-added taxes (VAT). This list will highlight what you should know about VAT, how to price your products right, and why is it important to consider VAT in your product pricing.

What Is VAT?

As mentioned, value-added tax, or VAT, is known as the goods and services tax. It is the amount of money put in addition to the cost of producing the material. It depends on where you are located and what type of taxation laws are present in your place.

Sales tax and VAT are closely related terms, but they are different from one another. They are similar in the way that they are both sources of revenue for the government based on consumer consumption. For the rest of the world, VAT is charged and collected at each point of the supply chain. Thus, it’s very important for a startup business to establish a strategic tax department that will oversee the assessment of tax functions or tax transformation. In this way, businesses can evaluate if their pricing would be right, as well as the cost for people, machines, and processes.

Knowing the laws of VAT in your area is very important since the successful navigation of international markets depend on those laws.

Importance of VAT in Product Pricing

1. VAT Determines Final Price For the Consumers

The amount of tax to be added to a product will be determined as a percentage by the state. As the name suggests, the value-added tax is added by the business on top of the costs of services and raw materials that were used to create the product.

VAT in product pricing

2. Two Types of Value-Added Taxation

Method of collection

VAT can either be invoice- or accounts-based. When VAT is applied through invoice-based, the seller of the product adds VAT on his or her output and gives the buyer an invoice which indicates the amount of VAT that was added into the product. That is the input tax. When the buyer decides to sell the product, he or she can add additional VAT and that will be considered as an output tax. The distinction between the input and output taxes will be given to the government, depending on the law that is in place.

Through an accounts-based collection method, the sellers are not required to give an invoice that indicates the tax. Instead, VAT is measured as the difference between the allowable purchase and the revenue. The majority of the countries today adapt the invoice-based collection method, while Japan uses an account-based method.

Timing Of Collection

VAT (also accounting generally) can be either cash or accrual-based. Cash-based accounting is a simple form of accounting. In this method, revenues are recorded on the date that funds were received from the payment of products or services of a certain business. When bills are needed to be paid, cheques will be written, and the expenses are recorded on the date that the cheque was issued. The focus of cash-based accounting is the amount of money sent in the bank and making sure that bills are cleared. In cash-based accounting, some effort is exerted to match revenues and expenses.

On the other hand, accrual-based accounting matches the revenue on the date that payments were received, and the expenses when cheques were issued. Accrual-based accounting is more complex than cash-based accounting, but the main advantage is that it provides more details and insights into your business. This type of accounting tracks all the receivables and payables and it allows you, as the business owner, to match the revenues and the expenses which leads to more detailed and substantial financial reports.


Value-added taxes (VAT) is important in determining the final product price for consumers. The determination of the right VAT can be very crucial especially for a startup business. Knowledge of it can provide an edge over competitors and can advance the business. However, non-compliance with VAT can have serious penalties that vary country by country. The business will be liable to any tax law that was violated, and this can cause serious repercussions on the business. Make VAT a priority when you are doing business and witness your business to expand internationally. 

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan