Example
$1,050 including 5% GST is $1,000 net and $50 of tax. To get there you divide by 1.05, not by 0.95.
What it means in practice
GST works the same way VAT does. Each business in the chain charges it on what it sells and reclaims it on what it buys, so the cost falls on the end customer rather than accumulating at every step.
Rates differ by country and often by what is being sold: Canada charges 5% federally with provincial additions, India uses several slabs, Australia 10%, New Zealand 15% and Singapore 9%.
It is not the same as US sales tax, which is charged once at the point of sale to the final customer, with resellers exempt rather than reclaiming.
The mistake to avoid
Removing GST by subtracting the rate from the total. At 5% that is wrong by a couple of dollars; at 18% it is wrong by more than three percent of the invoice.
Work it out
Input tax credits, which is the part that matters
The reason GST does not pile up at every stage is that a registered business reclaims the GST it paid on its own purchases and remits only the difference. That reclaim is why your customer wants the tax broken out on the invoice: without the figure they cannot claim it, and an invoice they cannot claim against is one they will query.
A second example
A workshop in Ontario bills $4,000 plus 5% GST, so $4,200. It paid $1,050 including GST for materials, of which $50 was tax. It remits $200 less $50, which is $150. The tax it charged was never its money and the tax it paid was never its cost.
Related terms
- Aging bucketOne of the age bands an unpaid invoice falls into: current, 1 to 30, 31 to 60, 61 to 90, or over 90 days past due.
- Billable hoursThe hours a client actually pays for, after time off and all the work nobody charges for.