How To Calculate GST

Goods and services tax is a broad-based consumption tax applied to most sales of goods and services, collected by the seller and remitted to the government. It is the name used in Australia, Canada, India, New Zealand and Singapore, among others.

In structure it works like a VAT. Businesses charge GST on their sales and claim a credit for the GST they paid on their purchases, so the tax falls only on the value each business adds, and the final consumer bears the whole amount.

Adding GST is a straightforward multiplication. A 500 base at 10% carries 50 of tax, giving a 550 total. The seller keeps the 500 and holds the 50 to remit, so it is never really their money.

Removing GST is a division, not a subtraction. Divide the tax-inclusive total by one plus the rate. On 550 at 10%, 550 divided by 1.10 is 500. Subtracting 10% of 550 instead gives 495, which is wrong because the rate applies to the base of 500, not the total.

Some jurisdictions split the rate between a national and a regional share. Canada's harmonised sales tax, for example, combines a federal 5% with a provincial portion that varies by province, and India's GST has central and state components. The arithmetic is identical; only the destination of the collections differs.

Registration usually depends on turnover. A small business below the threshold may not have to register or charge GST at all, while one above it must. The threshold varies widely, so the first question for any business is whether it is required to register.

Some supplies are GST-free or input-taxed. Fresh food, medical services and education are commonly exempt or zero-rated, and exported goods are usually zero-rated so that the tax falls in the destination country rather than the origin.

GST-free and input-taxed are not the same. A GST-free sale carries no tax but the seller can still claim credits on its inputs, while an input-taxed sale carries no tax and the seller cannot. Confusing the two misstates the true cost of the supply.

For a business the tax is mostly a cash-flow matter rather than a cost, because input credits offset the GST charged on sales. The exception is a business making input-taxed supplies, which cannot recover the tax and therefore absorbs it.

Cash-flow timing can still bite. A business that charges GST on an invoice but is paid late must still remit the tax on time, so it can temporarily fund the tax from its own cash. Managing the gap between invoicing and collection is a real working-capital issue.

The base price is what appears in revenue. Accounting records sales net of GST, because the tax is held on behalf of the authority. Recording the tax-inclusive figure as revenue would overstate both turnover and profit.

When comparing a GST price with a non-GST price, always reduce both to the net base. A 10% GST on an Australian price and a 5% sales tax on a US price are not comparable at face value, but the pre-tax figures are.