When to Charge GST on Your Goods and Services

The Goods and Services Tax (GST) is a broad consumption tax applied to most goods and services sold for domestic use. It functions as an indirect tax, meaning consumers bear the cost, but businesses selling the goods and services are responsible for collecting and remitting it to the government. Many countries have adopted GST or a similar Value Added Tax (VAT) system to simplify taxation. The tax is often included in the final price, ensuring transparency for the consumer at the point of sale.

Determining Your Obligation to Charge GST

A business’s obligation to charge GST depends on whether its revenue or sales exceed a specific registration threshold within a defined period. These thresholds vary by jurisdiction but are a common feature across most GST systems, designed to exempt smaller businesses from the immediate compliance burden. For instance, some countries set thresholds around $20,000 to $40,000 for goods and services, with lower limits for certain regions or business types.

Businesses that exceed these revenue thresholds are required to register for GST. This requirement applies to various business structures, including sole proprietors, partnerships, and corporations. Some activities or industries might have unique registration rules regardless of turnover, such as certain digital services or inter-state suppliers.

Even if a business falls below the mandatory registration threshold, it may opt for voluntary GST registration. Advantages include enhancing business credibility and allowing the business to claim input tax credits for GST paid on its own purchases. Voluntary registration can also facilitate transactions with larger businesses or international clients who prefer to deal with GST-registered entities. However, voluntary registration also brings increased compliance obligations, including regular tax filings and adherence to GST regulations.

Identifying Taxable Supplies

Understanding the classification of goods and services is key to determining when GST must be charged. Supplies fall into three main categories: taxable, zero-rated, and exempt. Each category carries distinct implications for charging GST and claiming input tax credits.

Taxable supplies are goods or services on which GST must be charged at the standard rate. This includes common commercial activities and products. Sales of most consumer goods, professional services, and commercial rentals are considered taxable supplies. Businesses making taxable supplies must add GST to the price and remit it to the tax authorities.

Zero-rated supplies are a specific type of taxable supply, but the GST rate applied to them is 0%. While no GST is collected from the customer on these supplies, businesses making them can still claim input tax credits for the GST they paid on related expenses. This mechanism ensures that the entire supply chain for these goods and services is free of GST. Common examples of zero-rated supplies include exports, basic groceries, and certain medical devices.

Exempt supplies are goods or services on which GST is not charged. Unlike zero-rated supplies, businesses making exempt supplies cannot claim input tax credits for GST paid on expenses related to those supplies. This means any GST embedded in the costs of providing exempt supplies becomes a business expense. Examples of exempt supplies include certain financial services, educational services, and residential rent.

Timing the Collection of GST

The “time of supply” rules dictate the moment when GST becomes due for an individual transaction. GST liability arises at the earliest of certain key events. These events include the date an invoice is issued, the date payment is received, or the date the goods are delivered or services are performed. This “earliest of events” rule helps prevent delays in tax collection.

For businesses, accounting for GST can follow either an accrual (invoice) basis or a cash basis. Under the accrual basis, GST is accounted for when an invoice is issued or received, regardless of when payment occurs. The cash basis, often available to smaller businesses, allows GST to be accounted for only when cash is received or paid. The choice of method impacts when the tax liability is recognized.

When dealing with deposits or progress payments for goods or services, GST is charged at the time these payments are received. For continuous supplies, such as subscriptions or ongoing services, GST is charged periodically, corresponding to the billing cycle or the provision of the service over time.

Invoicing and Recording GST

Once the obligation to charge GST is established, and the supply is identified as taxable, proper invoicing and record-keeping are important. A GST-compliant invoice must include specific information to ensure transparency and facilitate proper tax administration. Mandatory details include the seller’s GST identification number, the buyer’s name and address, a clear description of the goods or services, the quantity and unit price, the applicable GST rate, and the total GST amount charged, along with the total invoice value.

Calculating GST involves applying the relevant percentage rate to the net price of the goods or services. For example, if the standard GST rate is 10% and an item costs $100, the GST charged would be $10, making the total price $110. The invoice should clearly separate the net price from the GST amount.

Maintaining accurate records of all GST charged, collected, and paid on expenses is important for compliance and for claiming input tax credits. Businesses need to retain these records for five to seven years. These records include sales invoices, purchase receipts, bank statements, and documents supporting adjustments or calculations. Clear communication to customers regarding whether prices are displayed as GST-inclusive or GST-exclusive is also important.