Hi there accounting fans! Let’s talk about GST (Goods and Services Tax)!
Ok, real talk time – one of the things the many things I get asked as an accountant are:
“How can I get a GST refund?”
“Why am I paying so much GST?”
“I’m paying so much tax, why do I need to pay GST?”
But I get it, these questions come to me because people genuinely don’t know much about GST – so I’ve decided to write this simple guide to how GST works. I’ve written briefly about this in the past, but it’s a question that keeps coming up, so I’m revisiting this subject with a fresh new approach!
Your country doesn’t have GST? Well, at some point it will happen – and if you’re from Malaysia, it’ll probably happen again.
I will try to be as general as possible in this discussion, but at times, I will make specific reference to GST guidelines for NZ (which is where I’m based) – but I’ll let you know when this happens.
Ok, preamble over, let’s get into it!!
What is GST (Goods and Services Tax)?
Great question to kick things off!
GST stands for Goods and Services Tax (obviously). In some parts of the world, this is also known as VAT – Value Added Tax. There will be slight variations on the tax depending on where in the world you live, but the basics are essentially the same. The underlying principle of GST is that:
GST is a tax placed upon the buyer of goods and services
What does this mean?
It means that when you go out and buy groceries for say $100, and you have 15% of GST (the standard NZ rate) to pay, you will pay $100 + $15 for GST for a total of $115 for groceries.
It really is that simple.
Most of the time, retailers (like Grocery shops, retail outlets and furniture stores) will list their prices with the GST amount included – so you will pay for the price that is billed.
More service oriented businesses (like accountants, builders, contractors and lawyers) will usually list their prices before GST and then slap on 15% GST when they bill you.
Either way, you still are paying GST.
GST applies to ALL individuals and businesses buying goods and services from GST registered businesses in that country. No exceptions.
How does Goods and Services Tax work?
So, you’ve gone and bought your groceries and you’ve paid your 15% GST.
What happens next?
The business you bought from (which is GST-registered) will then keep that 15% GST aside and then return that money to the Government. That money then gets used for projects for the betterment of the country (in theory anyway).
In other words, it is important to note that:
GST is a tax that GST-registered businesses collect on behalf of the government.
Hence why it is important for GST-registered businesses to pay GST to the government based on all the GST sales they have made. Simply because that money does not belong to them in the first place!
So, do ALL businesses have to pay GST?
No, only GST-registered businesses have to pay GST.
To be GST registered is as simple as registering online with the Inland Revenue Department. In NZ, if you are a business (company, sole trader or partnership) earning more than $60,000 in sales a year, it is COMPULSORY for you to register for GST.
So this means that as a buyer, you do not pay for GST to a business that is not GST registered. It’s that simple. But some business owners still don’t get it – so I’ll repeat that again here:
If you are not GST registered you CANNOT charge your clients GST!
It is also worth pointing out that private sales between individuals or businesses (even if they are GST registered) also DO NOT incur GST (since the transaction is private and is not related to the business practice of either party).
In the next part I will talk about what it means to be a GST-registered business!
Stay Positive!