Sales tax, VAT & GST

What is the difference between sales tax, VAT, and GST?

Sales tax, value-added tax (VAT), and goods-and-services tax (GST) are the three principal indirect-tax frameworks. Sales tax is a single-stage tax levied on the final retail sale to the consumer, with intermediate business-to-business transactions exempt where the buyer holds a resale certificate — the model used in the United States and in pre-2017 India. VAT and GST are economically equivalent multi-stage frameworks where tax is levied at each stage of the supply chain on the value added at that stage; registered businesses charge output VAT/GST on their sales and recover input VAT/GST on their purchases, with the net difference remitted to the tax authority [SC4]. The economic incidence of all three frameworks is on the final consumer; the administrative mechanism differs. Most major economies have moved to VAT/GST since the 1960s — the EU's common VAT system (now the VAT Directive 2006/112/EC), the UK's VAT regime, Canada's GST/HST framework, Australia's GST, India's post-2017 unified GST, and most non-US jurisdictions operate VAT/GST. The United States is the largest economy that retains state-and-local sales tax rather than a federal VAT; multiple proposals to introduce a federal VAT or border-adjusted tax have not passed Congress.

How does the US sales-tax system operate?

The United States has no federal VAT, no federal GST, and no federal general sales tax — indirect tax is administered at the state and local level. 45 states plus the District of Columbia impose a general sales tax; five states (Alaska, Delaware, Montana, New Hampshire, Oregon) do not impose a state-level sales tax, although Alaska localities can impose their own [SC1]. State sales-tax rates run from approximately 4 percent (Hawaii, Wyoming) to 7 percent (Mississippi, Tennessee, California, Indiana, Rhode Island), with combined state-plus-local rates reaching over 10 percent in some Louisiana, Tennessee, Arkansas, Alabama, and Washington localities. Roughly 13,000 local jurisdictions add additional county, municipal, and special-district sales taxes on top of the state rate. The Streamlined Sales and Use Tax Agreement among 24 US states standardises certain sales-tax administration features but does not harmonise rates. Sales-tax nexus rules changed materially after the Supreme Court decision in South Dakota v. Wayfair, Inc. (2018), which permitted states to impose collection obligations on out-of-state sellers exceeding economic-nexus thresholds (commonly USD 100,000 in sales or 200 transactions per year) without a physical-presence requirement. Use tax applies to taxable purchases on which sales tax was not collected at point of sale; compliance among individual filers is low but enforcement against businesses is increasing. Marketplace facilitator laws (in force in nearly all states by 2021–22) shift collection-and-remittance obligation to platform operators (Amazon, eBay, Etsy, Walmart Marketplace) on third-party seller transactions.

What is the standard EU VAT framework?

The EU operates a common VAT system under Council Directive 2006/112/EC and its amendments, requiring each member state to maintain a standard rate of at least 15 percent and permitting up to two reduced rates of at least 5 percent on specified categories [SC4]. Standard rates across the 27 EU member states for 2025 range from 17 percent (Luxembourg) and 19 percent (Germany, Cyprus, Romania) to 27 percent (Hungary — the highest standard rate in the EU). Reduced rates apply to most basic foodstuffs, books, public passenger transport, hotel accommodation, restaurant meals, residential construction, and a list of social-policy supplies — with the specific list determined by each member state within the directive's permitted scope. The zero rate applies to exports outside the EU and to intra-EU B2B supplies of goods (zero-rated at the supplier's end with the buyer self-accounting under the reverse-charge mechanism). The EU One-Stop Shop (OSS) and Import One-Stop Shop (IOSS) regimes (in force since 2021) simplify cross-border B2C VAT compliance — sellers register in a single member state and report all intra-EU B2C supplies through that single registration. The Vat in the Digital Age (ViDA) package (proposed 2022, partially adopted 2024-25) introduces digital reporting requirements and platform-economy rules. EU member states can introduce e-invoicing mandates with European Commission derogation — Italy was the first major implementer (2019), with Germany, France, Spain, and others following with phased rollouts from 2025-2027.

How does the UK VAT system compare post-Brexit?

The UK retained its VAT system after leaving the EU on 31 January 2020 / 31 December 2020 (transition end), with substantive changes from 1 January 2021. The standard rate is 20 percent, the reduced rate is 5 percent (domestic fuel and power, children's car seats, mobility aids), and the zero rate applies to most foodstuffs, books and newspapers, children's clothing, public transport, and exports [SC2]. The mandatory VAT registration threshold rose to GBP 90,000 of taxable turnover from 1 April 2024. Making Tax Digital for VAT (in force since 1 April 2019 for above-threshold businesses, expanded to all VAT-registered businesses by 2022) requires digital record-keeping and software-based VAT-return submission. The UK lost EU OSS/IOSS access from 1 January 2021; cross-border B2C supplies between the UK and EU now operate under Northern Ireland Protocol-derived arrangements (Northern Ireland remains in the EU VAT framework for goods), bilateral country-by-country compliance for direct UK-to-EU flows, and the OSS-Equivalent UK frameworks for non-resident sellers into the UK. The 2024 Sunak-government's planned VAT-related reforms continued under the post-2024 government's broader review of indirect-tax frameworks.

How does GST differ from VAT in India and other GST-adopting jurisdictions?

Goods and Services Tax in India, in force since 1 July 2017, is structurally a destination-based value-added tax with a dual federal-state administration unique to India. Central GST (CGST) and State GST (SGST) — or Union Territory GST (UTGST) — apply on intra-state supplies; Integrated GST (IGST) applies on inter-state supplies and imports [SC5]. Standard rates are 0 percent, 5 percent, 12 percent, 18 percent, and 28 percent, with a Compensation Cess on luxury and demerit goods (tobacco, automobiles, aerated drinks). The mandatory GST registration threshold for goods is INR 40 lakh of aggregate turnover (INR 20 lakh in special-category states); for services it is INR 20 lakh (INR 10 lakh in special-category states). The Composition Scheme is available for small suppliers up to INR 1.5 crore turnover at fixed concessional rates. E-invoicing for B2B transactions is mandatory for taxpayers with aggregate turnover above INR 5 crore. Other GST-adopting jurisdictions: Australia (10 percent flat since 2000), New Zealand (15 percent flat — widely regarded as the cleanest VAT globally), Singapore (9 percent from 1 January 2024), Canada (5 percent federal GST + provincial overlays). Each variant uses GST nomenclature but operates under VAT-equivalent input-tax-credit mechanics.

What registration thresholds and small-business regimes exist?

Mandatory registration thresholds vary materially: from EUR 0 (Spain, Belgium standard regime, France auto-entrepreneur exit threshold) and AED 375,000 (UAE) at the lower end, through GBP 90,000 (UK), USD 100,000 sales / 200 transactions (US Wayfair-derived state thresholds), EUR 25,000 (Germany Kleinunternehmer prior-year), AUD 75,000 (Australia GST), JPY 10 million (Japan two-fiscal-year base period), to NZD 60,000 (New Zealand), SGD 1 million (Singapore), MYR 500,000 (Malaysia Sales Tax / Service Tax variants by category), and ILS 120,000 (Israel Osek Patur). Most jurisdictions also operate small-business simplified regimes that combine reduced rates with simplified compliance: Italy regime forfettario at 15 percent flat (5 percent first 5 years for new activity) on revenue up to EUR 85,000 with imputed-cost coefficients; France micro-BIC/micro-BNC up to EUR 77,700 services / EUR 188,700 goods; Spain Recargo de Equivalencia for small retailers; UK Flat Rate Scheme up to GBP 150,000; Singapore Cash Accounting Scheme. The choice between standard-regime registration and a simplified regime is one of the most-discussed early-stage business-formation tax decisions practitioners have.

How is cross-border B2C taxed?

Most jurisdictions have introduced specific frameworks for cross-border B2C digital and remote services since approximately 2015, recognising that the historic place-of-supply rules (typically supplier-jurisdiction-based for services) created revenue leakage as digital services scaled. The EU OSS/IOSS framework requires non-EU suppliers selling to EU consumers above thresholds to register in a single member state and account for VAT through the simplified scheme. Singapore's Overseas Vendor Registration (since 2020 for digital services, expanded 2023 to all remote services and low-value goods) operates similarly. Australia's GST on cross-border B2C digital supplies and low-value imported goods (under AUD 1,000) since 2017–18. New Zealand's offshore-supplier-registration regime since 2016 (digital services) and 2019 (low-value imported goods). Canada has progressively extended GST/HST to non-resident digital and low-value-goods supplies since 2021. The UAE has reverse-charge plus non-resident-vendor-registration rules under VAT framework. Korea's Electronic Service Provider regime since 2015 (B2C digital), expanded 2019 to non-domestic-server-located providers. Most jurisdictions exclude B2B cross-border supplies from these regimes — the recipient self-accounts under the reverse-charge mechanism instead.

What is happening in Brazil's tax reform?

Brazil's indirect-tax system is in the middle of the deepest reform in its history. Constitutional Amendment 132/2023 enacted a comprehensive reform creating two new value-added-style taxes: the Imposto sobre Bens e Serviços (IBS — state-and-municipal share) and the Contribuição sobre Bens e Serviços (CBS — federal). The transition phases in over 2026–2033 [SC5]: 2026 tests at 0.9 percent CBS + 0.1 percent IBS as proof-of-concept rates; 2027 launches the full CBS replacing PIS and COFINS; 2029–2032 phases in IBS replacing ICMS (state — 17–19 percent) and ISS (municipal — 2–5 percent); 2033 completes the transition. The combined IBS+CBS rate is targeted to be revenue-neutral against the displaced taxes; preliminary technical projections cluster around 25–28 percent. A Selective Tax (Imposto Seletivo) on harmful goods (tobacco, alcohol, sugary drinks) launches in parallel. The Brazilian reform is the most significant indirect-tax reform globally in the post-2017 period and will materially simplify cross-border compliance for businesses operating in Brazil — replacing a fragmented six-tax system with a unified VAT-style framework over the seven-year transition.