Goods and services tax (GST) is a tax that is rendered on goods and services in many countries. It's a type of value-added tax (VAT), meaning that it's applied at each stage of the supply chain, is included in the final total cost and is ultimately paid by the end customer. In Australia, for example, net GST cash collections totalled AU$73.6 billion during the 2021–2022 fiscal year.

Businesses collect and remit GST to the government, but it's not actually a cost that they incur. However, it is still an important consideration for businesses. For example, companies need to adapt their pricing strategies so that the final price remains attractive to customers, while still covering GST. In terms of accounting, businesses must track all transactions meticulously to accurately calculate the GST that they must ultimately remit. This requires a solid recordkeeping system and, often, investment in software or services that can handle GST computations and filings.

The applicability of GST can vary by product, service and location – creating an intricate environment for businesses operating in multiple jurisdictions. Some goods and services may be exempt, while others may be taxed at different rates. While GST poses some challenges in terms of compliance, pricing strategy and accounting, it also simplifies the tax structure by replacing multiple indirect taxes.

Managing GST effectively is a key part of operations, demanding attention to detail, an up-to-date knowledge of various tax laws and reliable, consistent systems for tax collection and recordkeeping. Below is a guide to what businesses need to know about GST, including how to calculate it and how Stripe can help to simplify its management.

What's in this article?

• GST vs other forms of taxation for businesses
  
• GST's relationship to the business activity statement (BAS)
  
• How to determine the GST amount for your business
  
• How to calculate GST
  
• How Stripe can help with tax management
  

GST vs other forms of taxation for businesses

GST is far from being the only tax consideration for businesses, but it stands out from other types of taxes for several reasons. Here's a rundown of the distinctions:

Nature of taxation

• Value-added approach: Unlike a traditional sales tax imposed at the point of sale, GST is applied at every stage of the production and distribution process. This means that at each step where value is added, GST is charged.

• Input tax credits: Businesses can claim credits for the GST paid on their inputs, which ensures that the ultimate burden of the tax falls on the end customer. This feature distinguishes GST from a cumulative tax system where tax is levied on the total value, including taxes at previous stages.

Scope and coverage

• Broad-based tax: GST typically encompasses a wide range of goods and services, making it a comprehensive form of taxation. This broad coverage contrasts with specific excise taxes or luxury taxes that target specific goods or services.

• Uniformity across products and services: While there are exceptions and varying rates in some cases, GST generally provides uniform tax treatment for different goods and services (unlike other tax systems where rates and rules vary for different categories).

Impact on business operations

• Recordkeeping and compliance: The multi-stage nature of GST necessitates detailed recordkeeping and reporting for businesses. This is more complex than single-point taxes and requires robust accounting systems.

• Price structuring and strategy: GST affects the prices that customers pay and businesses must take this into account when setting prices.

Tax burden and transparency

• Tax burden on the end customer: In a GST system, the final tax burden is shifted transparently to the end customer. This differs from corporate taxes or other direct taxes, where the tax burden is on the entity earning the income.

• Visibility of tax: Normally, GST is stated explicitly on invoices and receipts, making the tax component clear to customers. This level of transparency is less common for some other tax systems.

Economic efficiency

• Prevention of cascading tax effects: GST's credit mechanism helps to prevent the cascading effect of taxes (i.e. a tax on a tax), which is a common issue in non-value-added tax systems.

• Encouragement of compliance: The structure of GST encourages tax compliance as businesses need to report their sales and inputs to claim tax credits, which in turn creates a self-regulating system.

With the scope of all the taxes that businesses need to think about, it's useful to consider them as a whole – rather than as mere boxes to tick. Your decisions will be stronger and more comprehensive if you think about the specifications, intersections and implications of each tax. Once you have understood these different aspects, you will better appreciate the role and function of GST in comparison with other forms of tax, which can lead to more informed decision-making and compliance strategies.

GST's relationship to the business activity statement (BAS)

In Australia, the business activity statement (BAS) is a form that businesses submit to the Australian Tax Office to report their tax obligations, including GST. Within this form, businesses detail sales, purchases and the resulting GST that they need to pay or are due to receive back. Essentially, it provides a regular update for the tax authorities and ensures that a business's records are kept up to date.

When a company sells a product or service, it adds GST to the sale price. This extra amount is not for the business to keep – the business is merely holding it on behalf of the tax office. Conversely, when a business buys products or services, it pays GST. However, if the business is registered, it can normally claim credits for the GST included in the price of purchases for the business.

For each reporting period, businesses tally up the GST on sales (output tax) and the GST on purchases (input tax). The BAS is where they report the difference between these two amounts. If the GST collected on sales exceeds the GST paid on purchases, the business owes money to the government. If it's the other way around, the business can claim a refund.

This process is designed to be straightforward, allowing businesses to manage tax reporting in a structured and consistent way. It's a self-assessment system, placing responsibility on businesses to keep accurate records and report honestly.

For companies, staying on top of GST and BAS obligations is key. It ensures that they remain compliant with tax laws, while also providing a clear view of their taxable activities, which is necessary for informed decision-making and financial planning. By including GST in normal BAS reporting, businesses can manage tax responsibilities steadily, without the need for sudden adjustments or corrections.

How to determine the GST amount for your business

Determining the GST that your business owes requires precision and due diligence. Let's break this down into specific, actionable points.

• Rate assessment: Identify the correct GST rate for your business. Different goods and services may have different rates. Consult the official rate chart on a regular basis to maintain accuracy.

• Nature of transactions: Differentiate between taxable and non-taxable sales. Also, distinguish between sales (for which you collect GST) and purchases (for which you may be able to claim GST credits).

• Volume of sales: Your total sales volume has a direct effect on your GST calculations. Larger volumes mean that more GST is collected and that you potentially have more credits to claim on purchases.

• Business size and model: Whether you operate on a large scale or run a small shop, your model will influence your GST reporting and liability. A wholesaler may operate differently in terms of GST than a retailer, even when selling the same product.

• GST credits: Tally up the GST paid on your business purchases. These are potential credits against the GST collected from sales, which will lower the overall amount that you will have to pay.

• Place of supply considerations: For businesses that supply goods or services across borders, it's important to understand the place of supply rules, which determine where a transaction is to be taxed. This affects the rate that you will apply and which authority you will report to.

• Documentation and recordkeeping: Keep detailed records of all transactions. This is non-negotiable for precise GST calculation and compliance.

• Updates and changes in law: Tax laws evolve. Staying informed of the latest changes to GST legislation that could affect your business is fundamental.

• Reporting periods: Decide whether monthly, quarterly or annual GST reporting best aligns with your business operations. Regular reporting can assist with budgeting and financial planning.

How to calculate GST

• Identify the applicable rate: Determine the GST rate that applies to the goods or services being sold. This rate is specified by tax authorities and can vary for different categories of items.

• Calculate GST on sales: Apply the GST rate to the sale price of each good or service to determine the amount of GST that should be added to the sale. This is the GST collected from customers.

• Tally GST on purchases: Record the GST paid on business-related purchases. This is the GST that the business has paid on its inputs.

• Determine net GST: Subtract the total GST paid on purchases (input tax credits) from the total GST collected on sales (output tax). If the collected GST is more than the paid GST, the difference is what the business owes to the tax authorities. If the paid GST is more than the collected GST, the business may be eligible for a refund.

• Maintain recordkeeping: Keep accurate records of all sales and purchases with the corresponding GST amounts, as these records are key for reporting and compliance.

• Make regular updates: Update these figures for each reporting period as required by the tax authorities. This ensures that the process remains transparent and manageable, allowing businesses to maintain an accurate account of their GST liabilities.

How Stripe can help with tax management

Stripe offers comprehensive solutions for managing GST and other tax requirements. Here's how:

• Tax compliance automation: Stripe automates sales tax, VAT and GST calculations on transactions, offering integrations that require minimal or even no coding.

• Easy setup: Configuring tax settings is straightforward with Stripe's Dashboard and can be done in just a few steps.

• Compliance management: Stripe can help you to monitor tax obligations and manage compliance by automating tax calculations for transactions – even those processed outside of Stripe.

• Integration options: Stripe Tax can work with Payment Links, Checkout, subscriptions and invoices. This flexibility allows you to add tax-compliance features to various parts of your payment process.

• Customised payment flows: For businesses with unique payment flows, Stripe's application programming interface (API) allows for customised tax calculation and collection.

Stripe allows businesses to access streamlined tax compliance, reducing the administrative burden and allowing you to focus on your core operations with the confidence that your tax obligations are being met accurately and consistently. Learn more about Stripe Tax.