There are many different types of indirect taxes. In the US, there is sales tax. Across Europe and in many other countries there is value-added tax (VAT). In Canada and other regions there is the goods and services tax (GST). Each of these taxes have similarities, but there are differences to be aware of if your business is expanding to new countries and navigating a new tax system.

In this article, we’ll focus on the details of the GST, including when you should be collecting it from your customers, how to register to collect GST, and what to do when it is time to file and remit.

What’s in this article?

• Understanding the goods and services tax (GST)
  
• GST and its applicability
  
• GST calculation and rates
  
• Impact of GST on businesses
  
• GST compliance and legal requirements
  
• Goods and service tax FAQs
  
• How Stripe Tax can help
  

Understanding the goods and services tax (GST)

The GST is a type of indirect tax levied on the sale of goods and services that is commonly found in Canada and the Asia-Pacific region. It’s paid by the customer and remitted to the tax authority by the business. Although businesses collect the tax, GST burdens generally rest solely on the customer.

The GST is very similar to VAT in that it’s meant to be levied wherever value is added, and not just at the final point of sale. In fact, some jurisdictions use VAT and GST interchangeably. Generally, GST revenue goes to the jurisdiction where a product is consumed, and not where it’s produced. Additionally, it’s often a flat percentage, making it easier for both businesses and governments to audit tax revenue.

GST and its applicability

How GST works

GST works as a flat tax levied on the sale of goods or services. A business will collect GST from the customer at the time of sale, and then remit that amount to the relevant tax authority. It’s a tax on what people purchase, and not what they earn.

In some countries, such as India or Canada, GST is meant to replace older and more complex systems of indirect taxing. In that way, it can help improve tax compliance, create a more traceable audit trail, and provide predictable tax revenue for governments.

What types of transactions are subject to GST?

In countries that levy GST, it can cover a wide range of economic activity, including:

• Sales: Sales of goods, including retail sales or sales of manufacturing equipment, is often subject to GST.
  
• Provision of services: Most types of professional services, from legal consulting to hairstyling, are subject to GST.
  
• Digital sales: GST also applies to goods or services that are exchanged digitally.
  
• Barter and exchange: In many countries with a GST, such as Canada, it can also include the barter or exchange of goods even if no money is exchanged.
  
• Imports: GST also applies upon arrival on goods or services that are imported into a country.
  

Which goods and services are taxed under GST?

In countries that levy GST, it can cover a wide range of economic activity, including:

• Manufactured and retail goods: Many countries levy GST on a wide range of manufactured items, from clothing and footwear to vehicles and manufacturing equipment.
  
• Intangible property: This can also include intangible property, such as digital products, ebooks, or software.
  
• Professional services: GST can also apply on various types of services, such as legal consulting, hairstylist services, or car repair and maintenance.
  
• Real estate: GST can be levied on the sale or rentals of commercial properties, new residential housing.
  
• Short-term accommodations: GST also often applies to short-term rentals, such as hotels.
  
• Transfer of business assets: GST can apply to selling business assets, such as equipment or vehicles.
  

In many countries with GST, there are exemptions. For example, basic or critical items like groceries, prescription medication, and medical devices are often “zero-rated,” or taxed at 0%. Other transactions, such as educational services or long-term rentals, are fully exempt and not taxed at all.

GST calculation and rates

How is GST calculated?

GST is generally meant to be a simplified and streamlined type of indirect tax. You can often calculate with a simple formula, multiplying the base price of a product or service by the GST rate and adding that sum to the total transaction cost. The formula would look like this:

Total price = base price + (base price x GST rate)

What are the current GST rates and their applications around the world?

GST rates, similar to VAT rates, vary depending on jurisdiction. The average standard rate of VAT in the EU is 22%. The rate of GST in Australia is 10%, in Singapore it’s 9%, and in Canada it is 5%. In New Zealand, the GST rate is 15%. Some goods that are exempt from VAT may not be exempt from GST, and vice versa.

In some countries with GST, the tax is levied at the federal level, but there are additional regional taxes businesses need to consider. For example, in Canada, businesses need to charge provincial state taxes (PST) in certain provinces in addition to charging GST. However, certain provinces have adopted a harmonized sales tax (HST) that combines GST and PST into one tax.

Impact of GST on businesses

How does GST affect businesses and customers?

GST affects businesses and consumers in several ways in jurisdictions where they are levied. For customers, GST provides transparency since the tax is clearly disclosed on receipts and not hidden in the final cost of the product.

Businesses may also see lower costs with GST, since it’s designed to only apply to the incremental value added at each stage in the manufacturing and supply chain process. Because of this, it can remove the “cascading effect” of taxes on products at each stage of the supply chain.

What are the advantages and disadvantages of GST for businesses?

GST can have both positive and negative effects on businesses. For example, GST streamlines tax checkpoints, making it easier for businesses to follow an audit trail. Since it only applies to incremental value added, it can also reduce the tax burden for certain kinds of manufacturing or production.

On the other hand, this type of tax can create compliance burdens because of frequently filing requirements–especially for smaller businesses. Businesses are also required to pay GST to vendors or suppliers immediately, even before they sell to customers, which can affect cash flow.

GST compliance and legal requirements

What are the legal requirements for GST compliance?

To stay compliant with GST regulations, businesses generally must take the following steps:

• Registration: Register for a GST identification number, often when their annual turnover crosses a specific threshold. Foreign businesses, however, may need to register for GST immediately after doing business in a country.
  
• Invoicing: Issue GST invoices that clearly state the GST identification number, the rate charged, and the description of goods or services exchanged.
  
• Recordkeeping: Maintain detailed records of all sales and purchases for a set period for potential audits. Typically, this is around the 5 to 7 year mark.
  
• Timely filing: Submit periodic returns and remit the collected tax to the government by the deadline to avoid hefty penalties. Common filing cadences are monthly or quarterly, depending on jurisdiction and business type.
  

When am I required to collect GST from customers?

The threshold to collect GST varies by country. For example, in Canada, a remote seller supplying goods and services in Canada must register for federal GST/HST when they make sales in Canada exceeding $30,000 CAD within the past 12 months. In Singapore, remote sellers must register for GST under the Overseas Vendor Registration regime if in a calendar year they (1) have a global turnover exceeding SGD 1 million and (2) make B2C supplies of digital services to customers in Singapore exceeding SGD 100,000. Global turnover refers to all supplies made that would be taxable supplies if made in Singapore.

To ensure your business is compliant, check with the specific tax laws in the country where you make sales to understand your tax obligations.

How do I register to collect GST?

In most countries with GST, businesses are required to register with the tax authorities before they begin collecting GST from customers. Businesses can register online on the appropriate tax authority website. Learn how to register to collect GST in Canada and how to register in other countries with GST.

How to file and remit GST

Submitting a GST return is the final step to compliance. If you have not collected GST from customers in a period and have no tax to remit, you may still need to file your return by the due date. Each country has their own return forms and filing frequency. Your due date and how often you file could depend on your annual sales revenue.

Filing frequency varies by country and business revenue, but businesses can usually submit returns and payments online. Failure to file and remit the correct amount of GST can result in interest and penalties.

Stripe Tax can make filing and remittance easier. With our trusted global partners, users benefit from a seamless experience that connects to your Stripe transaction data—letting our partners manage your filings so you can focus on growing your business.

What are the consequences of noncompliance with GST regulations?

Negative consequences for GST noncompliance include:

• Late filing fees: Many jurisdictions with GST regulations charge a daily fee from the time that a filing deadline is missed. Fees can range from $50 to $200 a day.
  
• Interest charges: If you owe GST tax and do not remit it by the deadline, the balance can be subject to interest. The exact interest rate ranges from around 8% in Canada to 18% annually in India, compounded daily.
  
• Operational disruptions: In many regions with GST, the tax authority will block frequent nonfilers from filing future returns, creating a backlog that can cause a business to grind to a halt.
  
• Registration suspension: Failure to file GST returns for an extended period of time can lead to the suspension of GST registration, which makes it illegal to move goods or services.
  
• Audit risks: Noncompliance can flag a business as a potential risk, making a full audit more likely.
  
• Searches and asset seizures: Noncompliant businesses are subject to searches by the authorities. Many jurisdictions can also seize goods and vehicles or freeze bank accounts to recover unpaid taxes.
  
• Reputational risks: GST noncompliance can lead to a loss of credibility with customers, suppliers, and banks, making it more difficult to operate.
  

Goods and service tax FAQs

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a GST registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and GST on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful API.

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations, and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.