Question 1

What is the difference between GST and VAT?

Accepted Answer

From a mathematical and structural standpoint, there is absolutely no difference between a Goods and Services Tax (GST) and a Value Added Tax (VAT). Both are multi-stage, indirect consumption taxes applied to the value added at each stage of the supply chain. The distinction is purely semantic and geographical. European countries and their former spheres of influence generally use the term VAT, while countries like Australia, Canada, New Zealand, and India chose the term GST when drafting their legislation, often to emphasize that the tax covers both physical goods and intangible services equally.

Question 2

How do I calculate the base price if I only know the total price and the tax rate?

Accepted Answer

You must divide the total inclusive price by one plus the tax rate expressed as a decimal. You cannot simply multiply the total by the tax percentage and subtract it. If you have a total price of $500 that includes a 20% VAT, you divide $500 by 1.20. The calculation is $500 / 1.20 = $416.67. This means the original base price was $416.67, and the tax amount embedded within the total is $83.33.

Question 3

Can a business keep the GST or VAT it collects from customers?

Accepted Answer

No, a business absolutely cannot keep the tax it collects from customers; doing so constitutes criminal tax evasion. The business is acting as a fiduciary agent for the government. The tax collected is known as Output Tax. The business must hold these funds and periodically remit them to the tax authority. However, the business is legally permitted to deduct the Input Tax (the tax it paid on its own business expenses) from the Output Tax before making the final payment, remitting only the net difference.

Question 4

What happens if my Input Tax is higher than my Output Tax in a given period?

Accepted Answer

If a business pays more GST/VAT on its purchases than it collects on its sales during a specific reporting period, it is in a net refund position. This frequently happens when a business is newly established and buying expensive capital equipment, or if the business primarily sells zero-rated goods (like exports). In this scenario, the tax authority owes the business money. The business files its standard tax return, and the government will issue a cash refund to the business for the exact difference, ensuring the business does not bear the economic burden of the tax.

Question 5

Do I have to charge VAT/GST to international customers?

Accepted Answer

Generally, exports of physical goods to international customers are "zero-rated," meaning you apply a 0% tax rate to the invoice, provided you maintain strict shipping documentation proving the goods left your country. However, the rules for digital services and software are entirely different. Many jurisdictions now require international sellers to charge the specific VAT/GST rate of the country where the consumer resides, regardless of where the seller is located. This requires cross-border sellers to actively monitor destination-based tax laws and potentially register for tax collection in foreign countries.

Question 6

Why do prices in the US exclude tax, while prices in Europe include VAT?

Accepted Answer

This difference stems from both legal requirements and the structural nature of the tax systems. In the European Union, Australia, and most VAT/GST jurisdictions, consumer protection laws strictly mandate that the advertised price on a store shelf must be the exact final price the consumer pays, inclusive of all taxes. In the United States, the single-stage Sales Tax varies not just by state, but by county and city, making it nearly impossible for national retailers to advertise a single tax-inclusive price. Therefore, US prices are advertised exclusive of tax, with the local tax calculated and added only at the cash register.

GST/VAT Calculator

Command Palette