VAT, GST and sales tax: what is the difference?

VAT (value-added tax), GST (goods and services tax) and sales tax are all taxes on consumption, paid by the customer and collected by the seller. The names differ by region, and so do the rules.

VAT and GST are charged at each stage of the supply chain, with businesses reclaiming the tax they paid on their purchases. Sales tax, as used in the United States, is usually charged only on the final sale to the customer.

Multiply the net price by the rate and add it. At a 20% rate, a net price of 100 carries 20 of tax, for a total of 120.

The same calculation works whatever the name of the tax. Enter the rate that applies to your product and your customer's location.

Divide the gross price by 1 plus the rate. A price of 120 including 20% tax has a net price of 120 ÷ 1.2 = 100, so the tax is 20.

A common mistake is to subtract 20% of 120, which gives 96. The tax is a percentage of the net price, not of the gross price.

Standard rates vary widely, and many countries apply reduced or zero rates to items such as food, books or exports. Rates also change, so check your tax authority.

Whether you must register and charge tax depends on your turnover and where your customers are. This is a case for professional advice rather than a calculator.