GST, VAT or sales tax: which number should you use?

Three names for a tax on spending

Shops use three different names for what looks like the same thing. A line near the bottom of a receipt adds a few percent, and the customer pays it.

• GST stands for goods and services tax. India, Australia, Canada, New Zealand and Singapore use the name.
• VAT stands for value added tax. The United Kingdom, Germany, France, most of Europe and the UAE use it.
• Sales tax is the name used in the United States. There is no federal GST or VAT. States, counties and cities each charge their own.

The names hide a bigger difference. GST and VAT work as a chain. Each business along the way charges tax on what it sells and deducts the tax it paid on what it bought. Sales tax is usually charged once, at the final sale to the buyer.

For the person paying at the till, the result looks alike: the price goes up by a percentage. For the person running a business, the rules are very different. That is why one article cannot stop at "which percentage".

The GST, VAT and sales tax calculator follows the country you choose in the header. The VAT calculator does the same arithmetic when you already know the rate. The GST answers page and the VAT answers page cover the questions people ask most often.

Rates people actually meet

Rates change, and some countries have several. The list below shows typical headline rates at the time of writing. Check the current schedule before you rely on any of them.

• United States. No federal rate. State sales tax is zero in a few states, including Oregon, Montana, New Hampshire and Delaware, and combined state and local rates are often between 4% and 10% elsewhere.
• Canada. 5% federal GST. Some provinces add their own sales tax, and others combine both into a single harmonised rate, usually between 13% and 15%.
• United Kingdom. 20% standard VAT, 5% reduced on some items and 0% on others, such as most food.
• Germany. 19% standard VAT and 7% reduced.
• Australia. 10% GST, with some goods such as basic food GST-free.
• New Zealand. 15% GST.
• Singapore. 9% GST.
• UAE. 5% VAT.
• India. GST on most goods and services is now concentrated in a 5% and an 18% slab, with a higher rate on a few luxury and sin goods and nil on some items. Older 12% and 28% slabs still appear on older invoices and in some tools, so use the current notification for the item you sell or buy.

Inside India, the tax splits into two parts for sales within a state: central GST (CGST) and state GST (SGST), each at half the rate. For sales between states it is a single integrated GST (IGST). An 18% sale inside a state is 9% CGST plus 9% SGST. Across states it is 18% IGST. The total is the same.

The same 10,000 in eight places

A simple way to see the difference is to take one net price and add the local tax. Use a net price of 10,000 and the typical rate.

• United Kingdom, 20% VAT: 12,000. Tax 2,000.
• Germany, 19% VAT: 11,900. Tax 1,900.
• India, 18% GST: 11,800. Tax 1,800.
• New Zealand, 15% GST: 11,500. Tax 1,500.
• Australia, 10% GST: 11,000. Tax 1,000.
• Singapore, 9% GST: 10,900. Tax 900.
• Texas, 8.25% combined sales tax in many cities: 10,825. Tax 825.
• UAE, 5% VAT: 10,500. Tax 500.

The currency does not matter for the arithmetic. The point is that a few percentage points change the total by hundreds on a 10,000 invoice. A small error in the rate scales fast.

Add the tax to a net price

When the price does not include tax, multiply by one plus the rate.

Gross price = net price × (1 + rate)

Tax amount = net price × rate

Examples with a net price of 8,500:

• At 5%: 8,500 × 1.05 = 8,925. Tax 425.
• At 10%: 8,500 × 1.10 = 9,350. Tax 850.
• At 18%: 8,500 × 1.18 = 10,030. Tax 1,530.
• At 20%: 8,500 × 1.20 = 10,200. Tax 1,700.

This is the direction used on an invoice that lists the price and tax separately. It is also how most shops in the United States and Canada show prices: the label says one number and the till adds the tax.

Take the tax out of a price that includes it

This is the direction where most mistakes happen. Many countries, including the UK, Germany, Australia, New Zealand and India, often show prices that already include tax. To find the net price and the tax inside it, divide by one plus the rate.

Net price = gross price ÷ (1 + rate)

Tax amount = gross price − net price

The shortcut for the tax is the gross price multiplied by rate ÷ (1 + rate). Here is the share of the gross price that is tax at common rates.

• At 5%: 4.76% of the gross price.
• At 10%: 9.09%.
• At 15%: 13.04%.
• At 18%: 15.25%.
• At 19%: 15.97%.
• At 20%: 16.67%.

Take a shelf price of 12,000 with 20% VAT included. The net price is 12,000 ÷ 1.20 = 10,000. The tax is 2,000. If you took 20% of 12,000, you would get 2,400 and a net of 9,600. The net is 400 too low, and the tax is 400 too high.

The inclusive versus exclusive guide walks through both directions with a few more examples. The calculator has a switch for it, so you do not have to remember the formula.

How the chain works for a business

If you sell goods or services, the tax you charge is not your money. You collect it for the tax authority. The chain works like this.

Take a product that ends up at a final price of 200 net with a 20% rate.

1. A manufacturer sells to a wholesaler for 100 plus 20 of tax. It pays 20 to the authority.
2. The wholesaler sells to a retailer for 150 plus 30 of tax. It collected 30 and paid 20 to the manufacturer, so it pays the difference, 10.
3. The retailer sells to the consumer for 200 plus 40 of tax. It collected 40 and paid 30 to the wholesaler, so it pays 10.

The authority received 20 + 10 + 10 = 40, which is exactly 20% of the final net price of 200. Each business paid tax only on the value it added. The consumer, who cannot reclaim anything, bore the whole 40.

A sales tax system skips the middle steps. Businesses buying for resale usually do not pay tax, and the retailer charges tax once, on the sale to the end customer. The total tax can be similar. The paperwork and the points of collection are different.

What this means if you invoice

A freelancer or small business registered for VAT or GST faces a simple but important rule: the tax on an invoice is not income.

Say you invoice a client 1,000 plus 200 of tax. The client pays 1,200. You keep 1,000 and owe 200 to the authority, minus any tax you paid on business purchases in the same period. If you paid 60 of tax on software and equipment, you send 140.

Three habits keep this safe:

• Show the tax as a separate line on every invoice, with your registration number where the law requires it.
• Keep the tax in a separate account or tracking line. Money you owe to the authority should not be spent on rent.
• File on time. Late filing often brings penalties that cost more than the tax itself.

Registration is not optional above a certain level of turnover. The thresholds differ widely and change over time. Examples at the time of writing include 90,000 pounds a year in the UK, 75,000 Australian dollars in Australia and 30,000 Canadian dollars over four calendar quarters in Canada. In India the thresholds vary by the type of supply and by state. Confirm the current figure with the authority.

The guide on VAT on invoices for freelancers explains the steps with an example invoice.

Zero-rated, exempt and out of scope

Four terms cause confusion because they sound alike.

• Standard-rated items carry the normal rate.
• Zero-rated items carry tax at 0%. The seller charges no tax but can still reclaim the tax on its own purchases. Exports and basic food are often zero-rated.
• Exempt items carry no tax, and the seller usually cannot reclaim the tax on its purchases. Some financial and health services are exempt.
• Out of scope items are outside the tax system altogether, such as wages.

For a buyer, zero-rated and exempt look the same on the receipt. For a seller, they are not. A zero-rated supplier recovers its input tax. An exempt supplier does not, and that cost is hidden in its price.

Selling or buying across borders

Cross-border sales add another layer.

• Exports of goods are often zero-rated, with proof that the goods left the country.
• Imports are normally taxed at the border, and the importing business may reclaim the tax if registered.
• Digital services sold to private customers in another country can require registration there. The EU has a one-stop scheme for sellers, for example.
• Business-to-business services often use a reverse charge: the buyer accounts for the tax instead of the seller.

A freelancer working for a client in another country should check the place-of-supply rule before sending an invoice. The same service can be taxed in one country and not in another.

Within India, the CGST and SGST versus IGST split follows the same logic: where the supply is considered to happen decides which tax applies.

If you are only a shopper

You do not need the chain to use the numbers. A few habits help.

• Compare tax-inclusive with tax-exclusive prices carefully. A price of 99 in the US plus 8.25% tax is 107.17. A price of 99 in the UK includes VAT already.
• Check receipts when you travel. Some countries refund tax to visitors on goods taken home. The rules and limits vary.
• Watch for tax on shipping. In some places shipping is taxed, in others it is not.
• Do not take tax off by hand with the wrong direction. Use the calculator when you need the net amount from a gross price.

A five-step method for any tax calculation

1. Find the rate. Use the official schedule for the item and place. Do not rely on memory.
2. Decide if the figure is net or gross. Ask whether the price already includes tax.
3. Pick the direction. Net to gross uses multiplication. Gross to net uses division.
4. Calculate the tax and the totals. Check that net plus tax equals gross.
5. Round once, at the end, unless the rules require rounding per line. Keep a note of which method you used.

A final cross-check is worth a minute. Net multiplied by the rate should equal the tax, and net plus tax should equal gross. If either fails, a step went the wrong way.

Worked example from start to finish

Ana is a freelance designer in Germany. She is registered for VAT. This quarter she sends one invoice and buys one piece of software.

Frequently asked questions