Goods and Services Tax (GST) and Value Added Tax (VAT) are effectively two names for the same type of indirect tax.
However, that doesn’t mean that GST and VAT are applied identically in all places. Each country has its own tax regulations, and there are different processes for complying with VAT/GST.
For example, each country decides which goods and services are exempt from GST tax vs. VAT. Some items may be subject to reduced rates. The deadline for filing tax returns is different from country to country.
In other words, VAT and GST are complex. When you operate in multiple countries, that complexity becomes exponentially more difficult to manage. If your organisation would benefit from this type of support, you can contact us.
What makes GST different from sales tax?
GST can be a confusing tax to understand, even though it’s straightforward. It raises questions like what’s the difference between GST tax vs VAT or income tax vs GST. In this case, it’s the difference between GST vs. sales taxation. Ordinary consumers will often experience GST and sales tax in similar ways. There may be minor distinctions (sales tax may not be included in the listed price of the item, whereas GST usually is), but the basic effect is the same: a tax added on to the price of a good or service.
When it comes to business transactions, things are quite different. Sales tax is a form of indirect or consumption tax that is functionally different from GST and VAT. To appreciate the difference, let’s first consider what makes GST and VAT distinct.
Unlike sales tax, GST and VAT are applied throughout the value chain. In practice, that means that businesses generally both charge and pay GST/VAT on goods and services in the ordinary course of doing business.
For example, a business may pay a GST/VAT tax rate on both raw materials and on repair services at its factory. It then charges wholesalers a VAT rate on its manufactured products.
Why is this so important? There are two main reasons. First, businesses need to ensure they comply with all relevant local GST or VAT regulations or risk serious penalties and fines. Second, registered companies can reclaim any GST or VAT they pay in excess of the GST/VAT expended on legitimate business operations. That is, managing GST or VAT is often an important way to reduce operational costs.
Sales tax is simpler. It only applies at the final point of consumption. Sales tax generally raises the same compliance and cash flow issues as VAT and GST at different points in the value chain.
It’s possible for GST and sales tax to exist in the same jurisdiction. For instance, some provinces in Canada may charge both GST and an additional sales tax on certain goods or services.
To complicate matters further, different rules may determine when each tax applies to a good or service.
As mentioned above, the basic principles of VAT and GST are similar around the world. However, there are important regional variations in how these taxes are implemented.
In India, businesses need to be aware of three types of GST:
Both the central government and individual states are permitted to impose taxes in India. CGST is applied by the central government. SGST is applied by the state in which the business is located.
In cases where the supplier and customer are in different states, IGST applies. IGST is distributed tax equally between the two relevant states.
Most countries with a GST or VAT system have a registration threshold that businesses need to pay careful attention to. Once a business exceeds the specified threshold of taxable supplies in a defined time period, it is obliged for VAT or GST registration, depending on which is applicable.
Once registered, the business needs to charge GST/VAT in accordance with the relevant regulations. It is also obliged to file regular GST or VAT returns.
While a VAT or GST implementation may be required of a company, it is not liable for both a VAT and GST tax rate. No country has both GST and VAT. (Note that Canada has both HST and GST apply, depending on the province.)
That said, many modern businesses have global operations. If you supply goods or services in more than one country, there’s a good chance you have multiple GST and/or VAT obligations.
Many businesses may even incur obligations without being aware of it. For that reason, businesses should seek expert global GST/VAT advice if they have any doubt about their compliance obligations. Tax authorities increasingly take compliance very seriously. GST and VAT non-compliance often pose serious business risks.
Managing global VAT and GST obligations can be complex, particularly across multiple jurisdictions. VAT IT simplifies this through an automated, end-to-end compliance solution that supports your business from start to finish, you can learn more about our approach on our global VAT compliance page. If you would like guidance on how this could apply to your organisation, you can contact us.
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