GST, or goods and services tax, is a tax on consumption that is charged at every stage of the supply chain, but each business only pays tax on the value it adds. A seller adds the tax to its price, collects it from the buyer, and then subtracts the tax it already paid on its own purchases before paying the difference to the government. The final consumer, who cannot claim anything back, carries the full cost. If a product sells for ₹10,000 and the rate is 18%, the buyer pays ₹11,800, of which ₹1,800 is tax.
This guide explains how the mechanism works, how rates differ between India, Canada and Australia, and how to calculate the tax forward and backward.
How does GST move through the supply chain?
The key idea is the input tax credit. Each registered business charges output tax on its sales and claims a credit for the input tax it paid on purchases used in the business. It pays only the difference.
Worked example at an 18% rate:
- A manufacturer buys raw materials for ₹6,000 plus ₹1,080 tax
- It sells the finished product for ₹10,000 plus ₹1,800 tax
- Tax payable by the manufacturer: ₹1,800 − ₹1,080 = ₹720
- The supplier of raw materials already paid ₹1,080 on its own sale
- Total tax collected by government: ₹1,080 + ₹720 = ₹1,800
The total equals 18% of the final price, no matter how many stages there are. That is why the system is called a value-added tax in many countries; this is one form of it.
What are the GST rates in India?
India’s GST Council restructured the rates with effect from 22 September 2025. According to the Press Information Bureau, the old four-slab structure was replaced by a merit rate of 5% and a standard rate of 18%, with a special 40% rate for a short list of sin and luxury goods. A few tobacco products remained on their earlier rates and cess for a transition period.
In India the tax is also split by where the sale happens:
- Within one state: Central and State tax, each at half the rate. At 18%, that is 9% CGST plus 9% SGST.
- Between states: Integrated tax at the full rate, 18%.
On a ₹10,000 sale inside one state, the invoice shows ₹900 CGST and ₹900 SGST. On the same sale to another state, it shows ₹1,800 IGST. The buyer’s total is ₹11,800 either way. Check the current rate for a product on the CBIC rate finder before invoicing, because classification decides the rate.
How does GST work in Canada and Australia?
Canada charges a federal rate of 5%. Several provinces combine it with their provincial sales tax into a single harmonized sales tax, or HST. The Canada Revenue Agency lists HST at 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, and Prince Edward Island, with Nova Scotia at 14% from 1 April 2025. Other provinces charge the 5% federal rate and may add a separate provincial tax.
Australia charges 10% on most goods and services. The Australian Taxation Office requires a business to register once its turnover for the tax reaches $75,000, or $150,000 for non-profit organisations.
How do you add the tax to a price?
Multiply the net price by the rate and add it on:
- Net price: $200
- Rate: 10% in Australia
- Tax: $200 × 0.10 = $20
- Price including tax: $220
The GST calculator does this for any rate and shows the split between net price and tax.
How do you remove the tax from a price that includes it?
Do not simply take 10% or 18% off the total; that removes too much. Divide by 1 plus the rate instead:
- Price including 18% tax: ₹11,800
- Net price: ₹11,800 ÷ 1.18 = ₹10,000
- Tax: ₹11,800 − ₹10,000 = ₹1,800
For Australia’s 10%, the tax in a tax-inclusive price is one-eleventh of the total: $220 ÷ 11 = $20. Taking 10% of $220 would give $22, which is wrong.
Is GST the same as VAT or sales tax?
The two systems work the same way: tax is charged at each stage with credits for tax paid on inputs. The name differs by country. A retail sales tax, like most US state sales taxes, is different. It is generally collected only once, on the final sale to the consumer, and businesses buying for resale usually use exemption certificates instead of claiming credits. Compare the approaches with the VAT calculator and the sales tax calculator.
Who actually bears the cost?
Businesses collect and remit the tax, but the economic cost falls on the final consumer, who cannot claim an input credit. A registered business that buys equipment can usually reclaim the tax on it; a household that buys the same equipment cannot. That is why business prices are often quoted excluding GST, while consumer prices usually include it.
What mistakes should small businesses avoid?
Common errors include charging the wrong rate because a product was misclassified, claiming input credits without a valid tax invoice, and forgetting that tax-inclusive prices need to be divided rather than discounted to find the net amount. Keep invoices organised by period so credits match the return you file. If your margins are tight, check how the tax interacts with pricing using the profit margin calculator, and use the percentage calculator for quick rate checks.
Once you see it as a tax on value added at each step, the invoices make sense: charge it on sales, credit it on purchases, and pay the difference.
Sources
- Press Information Bureau: GST rate rationalisation
- CBIC: GST rates for goods and services
- Canada Revenue Agency: GST/HST rates
- Australian Taxation Office: Registering for GST
FAQ
What does “How Does GST Work on Invoices and Sales?” explain?
GST, or goods and services tax, is a tax on consumption that is charged at every stage of the supply chain, but each business only pays tax on the value it adds. A seller adds the tax to its price, collects it from the…
How should I use this guide with a calculator?
Read the definitions and assumptions first, then open the linked calculator with the same inputs. Treat results as estimates, not professional advice.
Is this financial or medical advice?
No. Calcenzo content is educational. Confirm important decisions with a qualified professional and official sources for your situation.