In the course of your journey into the world of international selling, you may have come across two terms that often get used interchangeably: VAT and GST taxes. But what is Value Added Tax and Goods and Services Tax?
Both are types of consumption tax, which refers to any indirect tax levied on the consumer when paying for goods or services.1 Consumption taxes are one way governments worldwide make a buck (and then some) off the hometeam economy—whether or not the purchased product was produced at home or abroad.
Every seller breaking into international markets should be clear on the distinctions between VAT and GST to factor into their products’ price point in destination marketplaces. Here, we’ll take a closer look at the GST vs VAT tax and why they’re essential for clearing the border and keeping your prices competitive.
What Is VAT and GST?
Let’s start with the basics: is VAT and GST the same type of indirect tax? While it’s easy to conflate the two terms, in terms of business, they may present two separate occasions to fork over your earnings—which is why it’s vital to be able to differentiate between the two.
Let’s take a look.
VAT stands for value-added tax. While the U.S. remains one of the few countries that hasn’t adopted it yet, VAT is used by over 160 advanced global economies worldwide.2
The logic behind VAT is to extract a marginal profit from a product heading to market at each stage of manufacturing where value is introduced.3 For sellers, accounting for VAT is critical for several reasons:
- It dictates your product’s final price point (and competitiveness) in international markets,
- Meeting VAT compliance is a non-negotiable for clearing customs abroad,
- And accounting for VAT in advance will determine whether you have win-back potential on your business’ tax returns.
Like GST, VAT is ultimately paid for by the customer, but it’s business owners who face this tax and route it back to the tax authorities in a given foreign country. As a seller, you may be wondering, “When do I pay VAT on imported goods?”. In terms of VAT, if you don’t meet customs compliance at the border, you may be penalized with further fines or prohibitions on your enterprise if you want to continue operating overseas.
GST is the acronym for goods and service tax. It’s best to think of GST as a form of VAT, rather than an alternative to it.
Like VAT, GST is used to account for value added at each tier of the production process. Ultimately, this tax falls on the shoulders of the consumer at the time of transaction, where a flat percentage is added to the final sale price. Later, the proprietor of that good or service advances this additional fee to the federal tax authorities for collection.
Some major countries that use GST include:
- And the United Kingdom.
A notable difference between VAT and GST is that while the former is typically rendered on a material product, you’ll find that GST implementation is often imposed on many digital products and services. This means that while you must account for VAT to clear customs with a shipment, GST is typically collected online.
Depending on the country you’re shipping to, you may need to acquire both VAT and GST registration if you want to operate in their marketplace.
GST vs VAT: The Bottom Line
The truth is that GST and VAT are very similar and are often used interchangeably when discussing international tax systems.
However, any GST and VAT comparison reveals that they’re technically two distinct avenues by which the government acquires revenue from its economy—which means you could very well be paying both by means of double taxation, depending on where you’re doing business.
The key takeaways between GST and VAT tax law are as follows:4
- In some cases, products can incur both VAT and GST, while others may be exempt from either,
- Your business may need to register for both VAT and GST separately,
- And the rates of taxation vary not only between both taxes but between different countries that use them.
Let Zee Settle The GST vs VAT Debate
What can GST vs VAT tell us when deciding on your business’ strategy for shipping products? Two main morals, tactically speaking:
Staying competitive – For one thing, you’ll need to factor in any supply chain taxes imposed on your product in the course of its journey from manufacture to marketplace. If your ultimate price points don’t measure up (or down, as it were) to the competition, your customer may take their business elsewhere.
Customs clearance – For another, staying abreast of VAT and GST rates in every country where you conduct business is essential for preparing for the customs clearing process. If your consumption tax calculations are off, you’ll risk being fined or turned away at the border. In fact, when it comes down to the question of “How much does international shipping cost?”, the truth is it can vary by business. However, the inability to clear customs due to lack of tax preparation can contribute to a much heftier price tag for the seller.
One of the most sure-footed ways to handle GST and VAT is to streamline your international transportation protocol to shipments moving smoothly. For that, we recommend partnering with a triple-threat shipping partner, like Zee. Zee can:
- Take care of customs clearance in a laundry list of countries with different VAT and GST rates,
- Handle all customs paperwork, fees, and shipping mayhem abroad so you don’t have to,
- And help you initiate the VAT reclaim process to position your business for earning back both VAT and GST.
It would take years of study to tease out the granular difference between Value Added Tax and Goods and Services Tax. With Zee, you’ll be positioned to master the only one that matters: earning back as much as you can from whatever you paid for both.
- Investopedia. Consumption Tax. https://www.investopedia.com/terms/c/consumption-tax.asp
- CNBC. The value-added tax brings in billions for other countries, but the U.S. doesn’t have one. https://www.cnbc.com/2021/06/21/this-tax-brings-in-billions-worldwide-why-theres-no-vat-in-the-us.html
- Investopedia. Value-Added Tax (VAT). https://www.investopedia.com/terms/v/valueaddedtax.asp
- GoCardless. GST vs. VAT Tax: What’s the Difference? https://gocardless.com/guides/posts/gst-vs-vat-tax/