Tax / VAT
What is it
The calculated sales tax, Value Added Tax (VAT), or Goods and Services Tax (GST) applied to the subtotal. It acts as a collection mechanism for the government.
Regional tax regulations
The name of the tax and the standard rate differ significantly by country.
| Region | System Name | Standard Rate | Key Mechanic |
|---|---|---|---|
| EU | Value Added Tax (VAT) | 17% - 27% | Varies by member state. Strict invoicing rules. Input tax can be reclaimed. |
| USA | Sales Tax | 0% - 10% | State-based. Levied on the final consumer. No input tax credit usually available. |
| Australia | GST | 10% | Broad-based tax on most goods and services. |
| Canada | GST / HST | 5% - 15% | Combined federal (GST) and provincial (PST) taxes in some provinces (HST). |
| India | GST | 5% - 28% | Four-tier structure (5%, 12%, 18%, 28%). Dual model (State + Central). |
| Saudi Arabia | VAT | 15% | Standard rate increased to 15% in 2020. |
When is it required
Whenever the transaction is subject to tax laws in the relevant jurisdiction. Registered businesses must collect this. Failing to charge it creates a liability for the sender.
Reverse Charge Mechanism
In B2B cross-border transactions (especially in the EU), the responsibility to report VAT shifts from the supplier to the customer. The invoice must clearly state "Reverse Charge" and show 0% VAT, while including both parties' VAT IDs.
Common pitfalls
- Applying the wrong tax rate. Different goods attract different rates (standard vs. reduced).
- Charging tax on tax-exempt clients (like charities). This requires issuing a refund later.
- Calculating tax on the total instead of per line item. This causes rounding errors in accounting systems.
Common mistakes when filling the field
- Omitting the currency symbol next to the tax amount. This creates ambiguity.
- Failing to break down taxes by rate if multiple rates apply. This confuses the calculation.
- Showing the tax amount but not the tax rate percentage. The client needs the rate for their own records.
Why is it there
It ensures compliance with tax laws. The collected amount is not revenue but a liability owed to the government. It allows the business to offset input tax.