GST vs VAT: what is the difference?
GST and VAT are close cousins — both are consumption taxes added at the point of sale — but the name, rate and rules shift by country.
Same idea, different name
GST (Goods and Services Tax) and VAT (Value Added Tax) both work the same way: a percentage is added to the price of most goods and services, collected by businesses on the government’s behalf, and remitted on a regular schedule. Which word is used depends only on where the system was written. Australia, New Zealand, Canada, Singapore, India and Malaysia say GST; the United Kingdom, the European Union and most of the rest of the world say VAT.
The naming is not quite tidy even within one country. Canada runs a federal GST alongside provincial sales taxes, with several provinces combining the two into a Harmonised Sales Tax. India replaced a stack of state and central taxes with a single GST split into central, state and integrated components. In both cases the mechanism is the one described here, wearing local clothes.
The important exception is the United States, which has no federal GST or VAT at all. It uses state and local sales taxes instead, which are charged once at the final sale rather than at every stage — a genuinely different design, and the reason American guidance on this topic rarely transfers.
The credit chain: what "value added" actually means
The mechanism that makes GST and VAT one system is the credit chain. Each business in a supply chain charges the tax on what it sells and claims back the tax it paid on what it bought, remitting only the difference. The government collects the full amount on the final price, but it collects it in slices, from every business that touched the product.
Worked through: a timber yard sells $110 of wood to a joiner, of which $10 is tax; the joiner claims that $10 back. The joiner sells a table for $330, of which $30 is tax, and remits $30 less the $10 already claimed — so $20. The government ends up with $30 on a $300 table no matter how many businesses were in the chain, and each business has effectively paid tax only on the value it added. The free GST calculator will run the split in either direction if you would rather not do the arithmetic each time.
Two practical consequences fall out of this. First, the tax is not a cost to a registered business — it passes through — which is why the price a business quotes to another business is usually stated excluding it. Second, the whole chain depends on documentation: you can only claim back what you can evidence, which is why a valid tax invoice is a legal document rather than a courtesy.
Where the rates differ
Australia’s GST is a flat 10% with no reduced rates, which makes it one of the simplest systems to work with. New Zealand runs a flat 15%. The United Kingdom’s standard VAT rate is 20%, with a reduced rate for some categories such as domestic energy and a zero rate for others including most food and children’s clothing. Canada charges 5% federally, with provinces adding their own tax or combining into a single harmonised rate.
The European Union does not set one rate but does set floors: member states choose their own standard rate above a common minimum, and may apply reduced rates to a defined list of goods and services. That is why VAT on the same product genuinely differs between two neighbouring EU countries, and why "the EU VAT rate" is not a number that exists.
Multi-rate systems create a second question that flat-rate systems do not. In Australia the only question is whether a supply is taxable; in the United Kingdom or across the EU you must also decide which rate applies, and the classification arguments — a biscuit versus a cake, a hot pastry versus a cold one — are famous for a reason. The current figures for dozens of countries sit side by side on the tax rates reference, each sourced to its own authority.
Registration thresholds matter more than the rate
For a small business the rate is rarely the interesting number. The threshold is, because it decides whether any of this applies to you at all. Almost every GST or VAT system sets a turnover level below which registration is optional, and crossing it turns a business that simply invoiced into one that collects tax, files returns and keeps a particular kind of record.
Australia sets that level at $75,000 of GST turnover, or $150,000 for a not-for-profit, and the test is forward-looking as well as backward-looking — you are expected to register once you reasonably expect to reach it, not once you have. The United Kingdom, New Zealand, Singapore and India each set their own figure, and several have moved theirs in recent years, so the current number is worth confirming with your own authority rather than remembering.
Registering voluntarily below the threshold is a real option and sometimes the right one. It lets you claim back the tax on business purchases, which matters if you buy a lot of equipment or sell mostly to other registered businesses who do not care about the tax on your invoice. It is the wrong move when you sell mainly to consumers, because your price effectively rises by the rate on the day you register.
Selling across borders
Exports of goods are usually zero-rated or GST-free: you charge nothing on the sale but keep the right to claim back the tax on everything you bought to make it. That is deliberate — consumption taxes are meant to be paid where the thing is consumed, so a product leaving the country leaves the tax system with it.
Services and digital products follow a place-of-supply rule instead, and this is where cross-border freelancing gets complicated. Broadly, the question is where the customer is and whether the customer is a business or a consumer. Selling a service to an overseas business is commonly outside your own system; selling a digital product to an overseas consumer increasingly is not, because most major economies now require foreign sellers to register and charge local tax on consumer sales once they pass a threshold there.
The practical advice is narrow and worth following: keep evidence of where each customer is and whether they are registered for tax in their own country, from the first overseas sale rather than from the first question about it. That evidence is what supports a zero-rated treatment later, and it is very hard to reconstruct.
What stays the same, and what to check locally
In every system that uses this design, registered businesses add the tax to what they charge, generally claim back what they paid on business purchases, and remit the net figure on a schedule set by the authority — monthly, quarterly or annually depending on size. Understanding one system genuinely does make the next one easy to follow, because only the vocabulary changes.
Four things change with the border and need checking every time: the rate or rates, the registration threshold, the filing frequency, and the labels on the return itself. Australia reports on a Business Activity Statement — how BAS lodgement works covers that form in detail — while the UK files a VAT return, New Zealand a GST return and Canada a GST/HST return. Same figures, different boxes.
The fifth thing, and the one that causes most of the real errors, is the treatment of supplies that carry no tax. Every system distinguishes between a supply that is zero-rated or GST-free and one that is exempt or input-taxed, and the difference is not the rate — it is whether you keep the right to claim credits. That distinction is worked through properly in what GST treatment means on your activity statement. This is general information, not personal tax advice — check what applies to you with your accountant or the relevant tax authority.
Take it further
Add or remove GST/VAT on any amount, with the formula shown every time.
GST (Goods and Services Tax) →Australia’s flat 10% tax on most goods and services.
GST turnover ($75,000 threshold) →The gross income figure that triggers GST registration.
GST-free →Sales with no GST where you still claim credits on your purchases.
Input taxed →Sales with no GST that also deny credits on related purchases.
Common questions
Is GST the same as sales tax?
Not quite — US-style sales tax is usually charged once, at the final sale to the consumer. GST/VAT is charged at each stage of the supply chain, with businesses claiming back what they paid along the way.
Which countries use GST and which use VAT?
Australia, Canada, New Zealand, Singapore and India use "GST". The UK, the EU and most other countries use "VAT". The underlying mechanism is the same consumption tax.
How do I compare rates across countries?
The free tax-rates and compare tools list current GST/VAT rates side by side for dozens of countries, sourced to each government authority.
What is the difference between zero-rated and exempt?
Both mean the customer pays no tax on the sale, and they differ entirely in what happens behind it. A zero-rated or GST-free supply keeps your right to claim back the tax on the purchases that produced it. An exempt or input-taxed supply removes that right, so the tax you paid on related costs becomes a real expense. Two sales that look identical on the invoice can therefore have opposite effects on your return. This is general information, not personal tax advice — check what applies to you with your accountant or the relevant tax authority.
Do I charge GST or VAT to an overseas customer?
Usually not on exported goods, which are typically zero-rated or GST-free while you keep the credits on what you bought to produce them. Services and digital products follow a place-of-supply rule instead: sales to an overseas business are commonly outside your own system, while sales to overseas consumers increasingly require registering in the customer’s country. Keep evidence of where each customer is and whether they are registered. This is general information, not personal tax advice — check what applies to you with your accountant or the relevant tax authority.
Can I claim back GST or VAT on purchases made before I registered?
Sometimes, and the rules are specific rather than general. Several systems allow a registered business to claim tax on stock still held and on certain services bought shortly before registration, within a set window and with the original invoices intact. Because both the window and the eligible categories vary by country, the safe move is to keep every pre-registration invoice and ask your accountant at registration rather than assume either way. This is general information, not personal tax advice — check what applies to you with your accountant or the relevant tax authority.
Sources
- ATO — GST — Australia’s 10% GST, the $75,000 registration threshold and GST-free treatment of exports
- GOV.UK — VAT rates — The UK standard, reduced and zero rates and the categories each applies to
- Inland Revenue (New Zealand) — New Zealand’s 15% GST, its registration threshold and GST return filing
- Canada Revenue Agency — The federal 5% GST, provincial sales taxes and the harmonised HST provinces
General information computed from published government guidance, not personal tax advice.
More on tax & compliance
A Business Activity Statement (BAS) reports the GST you have collected and paid to the ATO, usually every quarter. Here is what actually happens, step by step.
What “GST treatment” means on your activity statement (and the three codes people mix up)A GST treatment is the code that says what kind of supply a transaction is, and therefore which label on your activity statement it feeds. Three of those codes carry zero GST and still mean different things: GST-free, input-taxed and BAS Excluded. Here is the difference, worked through on real lines from a bank feed.
Tax deductions for sole traders: what you can actually claimSole traders can generally claim any expense genuinely incurred in running the business. Here are the categories that come up most often.
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