Goods and Services Tax (GST) Explained for Small Businesses

The goods and services tax (GST) is a consumption-based tax charged on goods and services in many countries worldwide. While the United States does not have a federal GST, U.S. small businesses often encounter GST when selling internationally, working with overseas clients, or operating ecommerce stores that ship abroad.

For U.S. business owners, GST usually becomes relevant when revenue crosses borders. If GST is handled incorrectly, it can lead to undercharging customers, issuing non-compliant invoices, delayed payments, and penalties imposed by foreign tax authorities.

This guide will cover:

• The goods and services tax meaning and definition
• How GST differs from U.S. sales and excise taxes
• When U.S. businesses must register for GST
• How to calculate, collect, and remit GST
• GST compliance challenges for ecommerce businesses
• GST rates and structures by country

What Is the Goods and Services Tax (GST)?

The goods and services tax definition refers to an indirect tax applied to the sale of goods and services at each stage of the supply chain. The final tax burden is paid by the consumer, while businesses act as tax collectors on behalf of the government.

From an accounting standpoint, GST is not business income. It is a temporary liability. This distinction matters when preparing financial statements and reconciling accounts, as explained in this guide to financial accounting.

GST vs. U.S. sales tax

In the United States, businesses do not deal with a federal goods and services tax. Instead, tax on goods and services is split across state sales taxes and federal excise taxes, each with very different rules and compliance requirements.

State sales tax is charged only at the final point of sale to the customer. Businesses collect it once, remit it to the state, and cannot claim credits for tax paid on expenses. Sales tax rules vary by state, which is why many U.S. businesses rely on strong bookkeeping practices to track taxable and non-taxable sales accurately.

Federal excise taxes, on the other hand, apply only to specific goods and activities, such as fuel, alcohol, tobacco, airline tickets, and certain manufacturing or environmental activities. 

These taxes are not broad-based and do not apply to most everyday business services. The IRS outlines how excise taxes work, but for most service-based small businesses, excise tax is a limited or non-issue.

GST systems used abroad work very differently.

Under a GST system:

• Tax is applied at every stage of the supply chain
• Businesses must track tax collected and tax paid
• Input tax credits reduce the amount owed
• Invoices must meet strict formatting and disclosure rules

This means that when a U.S. business sells into a GST country, it cannot treat GST like U.S. sales tax. GST must be recorded as a liability, reconciled in the general ledger, and reported through formal GST returns.

From an accounting perspective, this difference is critical. GST affects:

• How revenue is reported
• How liabilities appear on the balance sheet
• When tax must be paid, even if the customer has not yet paid the invoice

This is especially important for U.S. businesses using accrual basis accounting, where GST may be owed based on the invoice date rather than cash receipt.

Goods and Services Tax Explained

GST operates on a credit-offset system. Businesses charge GST on taxable sales (output tax) and claim credits for GST paid on business expenses (input tax). The difference between the two is what gets remitted to the tax authority.

This structure makes accurate recordkeeping essential, especially for businesses with high transaction volume or international customers.

When am I required to collect GST from customers?

A U.S. business may need to collect GST when it:

• Exceeds registration thresholds in a GST country
• Sells digital services to foreign customers
• Ships goods from overseas fulfillment centers
• Uses international marketplaces

Tracking international revenue accurately requires visibility into all transactions, especially when sales span multiple regions.

Who has to pay GST?

The customer ultimately pays GST as part of the purchase price. However, the business is legally responsible for:

• Charging the correct GST rate
• Issuing compliant invoices
• Filing returns and remitting tax

Because GST is invoice-driven, understanding what is an invoice and how tax must appear on it is essential for compliance.

How do I register to collect GST?

Goods and service tax registration is handled through government portals, such as:

• Canada’s GST/HST program
• Australia’s GST registration
• India’s GST portal

Once registered, your GST number must appear on invoices, and you must file returns on a set schedule.

How to File and Remit GST

GST filing is not a one-time task. It is the result of consistent bookkeeping throughout the year.

Typical GST filing workflow

1. Record GST collected on invoices
2. Track GST paid on expenses
3. Reconcile balances in your general ledger
4. Prepare and submit GST returns
5. Pay or claim the net amount

Maintaining clean records is much easier when your accounting follows double-entry accounting principles.

Businesses using accrual basis accounting must pay special attention to timing. GST may be owed based on invoice date, not when cash is received, which can impact cash flow.

How Is GST Calculated?

GST is calculated as a percentage of the taxable sale price.

Example GST calculation

GST must be shown clearly on invoices. Using automated tools to generate invoices reduces errors and simplifies reconciliation.

What Are the Benefits of the GST?

For governments, GST improves tax transparency and reduces tax cascading. For businesses, GST provides:

• Clear separation between revenue and tax
• Standardized documentation requirements
• Easier reconciliation and audit trails

From a reporting perspective, GST integrates directly into assets and liabilities, since collected tax increases short-term liabilities until paid.

Are VAT and GST the Same?

VAT (Value Added Tax) and GST (Goods and Services Tax) are often grouped together because they are both consumption taxes, but they are not identical in how they are implemented or administered. 

Understanding the differences matters for U.S. businesses that sell into multiple international markets, because VAT and GST compliance rules affect pricing, invoicing, cash flow, and filing timelines.

At a high level, both VAT and GST:

• Are charged on goods and services
• Are collected by businesses on behalf of the government
• Ultimately fall on the end consumer

However, the practical differences appear once you start issuing invoices and filing returns.

For U.S. businesses selling internationally, GST affects not just compliance but also invoicing, payment timing, and documentation, all of which play a role in how you actually get paid as a freelancer or contractor when working with foreign clients.

Dual Goods and Services Tax Structures

Some countries use a dual goods and services tax system, where tax authority is shared between a national government and regional governments. This structure directly affects how businesses classify transactions and report tax.

How dual GST systems work

In a dual GST system:

• One portion of the tax goes to the central government
• Another portion goes to the state, province, or territory
• The tax type depends on where the transaction takes place

India is the most well-known example, using:

• Central GST (CGST)
• State GST (SGST)
• Integrated GST (IGST)

The tax applied depends on whether a sale occurs within the same state or across state borders.

Why dual GST systems are complex for businesses

Dual GST systems require businesses to:

• Identify the customer’s location precisely
• Classify each transaction correctly
• Apply the correct GST type and rate
• Report tax separately to different authorities

For ecommerce businesses shipping goods across regions, this creates added complexity. A single misclassification can result in:

• Incorrect tax filings
• Delayed refunds
• Penalties or compliance notices

This is why strong transaction tracking and consistent journal entry accounting are critical when operating in dual GST jurisdictions.

Types of Goods and Services Taxes

Misclassifying GST types can lead to filing errors and delayed refunds.

Importance of GST for Ecommerce Businesses

GST compliance challenges

Ecommerce sellers face increased complexity due to:

• Cross-border shipping
• Marketplace facilitator rules
• Digital product taxation

Clear billing cycles help ensure GST is applied consistently.

Impact on pricing and profitability

GST affects:

• Product pricing
• Checkout totals
• Gross margins

Improper GST handling can distort income reporting and worsen cash flow problems, especially when tax is due before payment is received.

Documentation and tax calculations

Ecommerce businesses must maintain:

• GST-compliant invoices
• Proof of payment
• Clear audit trails

Knowing how to write a receipt of payment helps maintain defensible records.

How to Handle GST as an Ecommerce Business

GST registration process

Many ecommerce sellers must register for GST even at relatively low revenue thresholds, particularly when selling into countries such as Canada, Australia, or New Zealand. Selling through online marketplaces does not automatically remove GST responsibilities.

Registration is commonly required when you:

• Sell taxable goods or digital services to customers in GST countries
• Store inventory or use fulfillment centers located overseas
• Exceed country-specific revenue thresholds
• Sell through marketplaces that place tax responsibility on the seller

Your business structure also affects how GST registration works. Whether you operate as a sole proprietor, LLC, or corporation can influence:

• Who is legally responsible for GST compliance
• How registration is completed
• How liability is handled if issues arise

Common registration mistakes to avoid:

• Registering only after being notified by a tax authority
• Assuming a marketplace automatically handles GST
• Issuing invoices without a valid GST number once registration is required

GST filing and payment

GST filing schedules vary by country and may be monthly, quarterly, or annual. Even small ecommerce businesses may owe GST before customer payments are fully collected.

To manage this effectively, many U.S. sellers:

• Align GST payments with quarterly estimated tax planning
• Set aside collected GST in a separate account
• Monitor outstanding invoices tied to GST liabilities

Using automated summaries from business reports helps by:

• Ensuring GST is calculated consistently across sales
• Reducing manual reconciliation work
• Making it easier to share clean data with accountants or tax advisors

GST Rates by Country (Quick Reference)

Ready to Manage GST With Confidence?

For U.S. businesses selling internationally, GST compliance depends on more than knowing the correct tax rate. It requires accurate invoicing, consistent recordkeeping, and reliable reporting that aligns with foreign tax authority requirements. 

GST must be clearly separated from revenue on invoices, tracked as a liability, and supported by documentation that can stand up to review or audit.With Invoice Fly’s invoicing software, you can apply taxes at the invoice level, track payments against each invoice, and maintain clear records of GST collected and paid.