GST vs VAT: What Is the Difference? A Simple Guide
If you invoice clients in more than one country, you will meet both GST and VAT. They look different on paper, but they do almost the same job. This guide explains what they have in common, where they differ and how to show them correctly on an invoice.
Short answer: GST and VAT are both consumption taxes that a registered business adds to its prices and passes to the government. The difference is mostly the name and the local rules.
What GST and VAT have in common
GST stands for goods and services tax and VAT stands for value added tax. Both are consumption taxes. They are added to the price of goods and services, the customer pays them, and the registered business collects them and passes them to the tax authority.
In both systems a business can usually subtract the tax it paid on its own purchases from the tax it collected on its sales. This is called input tax credit, and it is why the tax does not pile up at every step. The tax ends up being paid mainly by the final customer.
So what is the difference?
Mostly the name and the country. In practice, GST and VAT describe the same kind of tax. The details differ by country: the rates, which goods and services are exempt, how often you file, and how the tax is split between governments.
| Country | What it is called | Notes |
|---|---|---|
| Pakistan | Sales tax, often called GST | Sales tax on goods is federal. Sales tax on services is generally handled by the provinces, so rates can differ. |
| India | GST | Several rates depending on the item. Split into CGST and SGST within a state, and IGST between states. |
| United Arab Emirates | VAT | A single standard rate of 5%, with some zero-rated and exempt supplies. |
| Saudi Arabia | VAT | Standard rate of 15%. |
| United Kingdom | VAT | Standard rate of 20%, with reduced and zero rates for some items. |
Rates and rules change, so treat the table as a starting point and confirm the current position with the tax authority.
How it works, with a simple example
Imagine a business that buys supplies for 50,000 and pays 18% tax on them, which is 9,000. It then sells its product for 100,000 and charges 18% tax, which is 18,000. The business collected 18,000 and paid 9,000, so it sends the difference of 9,000 to the tax authority.
| Amount | Tax at 18% | |
|---|---|---|
| Purchases | 50,000 | 9,000 paid (input tax) |
| Sales | 100,000 | 18,000 charged (output tax) |
| Tax to pay the authority | 9,000 |
Some purchases do not carry creditable tax and some sales are exempt, so real returns can be more detailed. The idea stays the same: you pay the tax you collected minus the tax you paid.
What GST or VAT looks like on an invoice
On a tax invoice the tax is shown as its own line. A good invoice shows the name of the tax, the rate, the tax amount and the total including tax. It also shows your tax registration number, such as an NTN or STRN in Pakistan, a GSTIN in India or a TRN in the UAE. See our checklist of what to include on a tax invoice.
Pick your country in the Billfy invoice generator and it fills in the usual tax name and rate, which you can edit. We also have pages for the Pakistan GST invoice, the UAE VAT invoice and the India GST invoice.
Tax-inclusive and tax-exclusive prices
A price can be shown with the tax included or without it. If a price of 118 already includes 18% tax, the tax inside it is 118 x 18 / 118 = 18, and the price before tax is 100. If a price of 100 is before tax, you add 18 to get 118.
The formula for the tax inside a tax-inclusive price is the price multiplied by the rate and divided by (100 + the rate). Always make it clear to your customer whether your quote includes tax.
Common GST and VAT mistakes
- Charging tax when you should not. If you are not registered, you generally cannot charge GST or VAT. Check the registration rules where you work.
- Using the wrong rate. Different items can have different rates, and some are exempt or zero-rated. Check the rate for each item.
- Not showing the tax separately. Customers need to see the price, the tax rate and the tax amount as separate lines.
- Leaving out your registration number. A tax invoice without it may not be accepted by the customer.
- Mixing tax-inclusive and tax-exclusive prices. Say clearly which one your quote uses.
- Losing purchase invoices. Where input tax can be claimed, you normally need the supplier invoice to claim it.
GST or VAT is not the same as WHT
Withholding tax is a different thing. GST or VAT is added to the price. WHT is deducted from your payment by the client. You can have both on the same invoice. Read our guide to WHT on an invoice for a worked example.
Make an invoice with the right tax
Choose your country and Billfy fills in the usual tax name and rate. Edit it if yours is different.
Invoice generatorUAE VAT invoiceFrequently asked questions
Is GST the same as VAT?
They are very similar consumption taxes. The main differences are the name, the country and the local rules, such as rates, exemptions and how the tax is shared between governments.
Which countries use GST and which use VAT?
VAT is used in the United Arab Emirates, Saudi Arabia, the United Kingdom and many European countries. GST is used in India and several other countries. In Pakistan the tax is usually called sales tax, and people often say GST.
Do I need to charge GST or VAT?
It usually depends on whether you are registered and on whether your sales go over a registration threshold. The threshold and the rules differ by country, so check with your tax authority or accountant.
How do I calculate the tax inside a price that already includes it?
Multiply the price by the rate and divide by 100 plus the rate. For a price of 118 with 18% tax, the tax is 118 x 18 / 118 = 18.
Can I show both GST or VAT and WHT on one invoice?
Yes. GST or VAT is added to the price, and WHT is shown as a deduction from the total. The invoice then shows the net amount payable.
Tax rules, rates and deadlines differ by country and change over time, and they depend on your situation. This guide is general information, not tax or legal advice, so confirm the details with your accountant or tax authority.