In this article
- What is GST?
- Why are foreign businesses responsible for GST?
- How should a foreign business handle GST?
- Step 1: Check tax registration thresholds
- Step 2: How does a foreign business register for GST?
- Step 3: What should you verify about your customers?
- Step 4: When does a foreign business have to charge GST?
- Step 5: What is a proper GST invoice? What are the best practices for tax invoicing?
- Step 6: How to submit GST returns
- Can a foreign business just ignore GST?
- This sounds complicated. What can help online businesses handle GST?
Goods and Services Tax is levied in several countries around the world. If you’re an online business or digital entrepreneur looking to grow abroad, listen up! It’s time to get serious about GST.
For decades, many remote sellers have thought that as long as they pay taxes in their home country, they’re as good as gold. But that’s not the case anymore.
As a supplier of digital products, you could be responsible for charging, collecting, reporting, and submitting this tax to the individual governments where your customers are located. Yes, this means multiple countries with their various tax rates.
But never fear! We’ve made it simple for you.
We’ve gathered all of the essential information, answered all the questions we imagine are kicking around in your head, and laid out everything about GST for remote sellers in one place.
Let’s get started.
What is GST?
We can answer the most obvious question first. GST stands for “Goods and Services Tax.” It’s a consumption tax that applies to the sale of either physical or digital products. That means when a customer purchases a good or service, they could pay GST on the spot.
The seller (your business) collects the tax from the customer and pays some or all of it to the government. In this way, you can see yourself as a kind of tax middleman. It’s not your money paying the tax, you’re just collecting and submitting the customer’s money to the government.
That’s why it’s important to know when to charge GST to your customers. Because if you don’t do it correctly, then actually it will be your money paying for it! The government will still expect the taxes from you, whether you knew to add it or not.
Currently, there are at least 8 countries that use GST as their national tax system.
Why are foreign businesses responsible for GST?
Because governments want to ensure they receive taxes on all goods and services consumed by their citizens, even goods and services coming from other parts of the world.
Physical products are taxed at customs. Digital goods obviously don’t cross any borders to pass through customs, so digital products have tax added through specific laws.
Try out our free GST Calculator to see your product's tax rate, amount, and final price.
If foreign businesses weren’t required to charge tax, imagine the disadvantage that would place on domestic businesses. Their products would cost more. Their local customers would look outside the country to find something cheaper. Then, when the domestic businesses suffer and make fewer sales, their governments collect less tax.
So, requiring overseas sellers to charge consumption tax evens the playing field for native vendors, and it increases tax revenues. It’s all economics, baby.
How should a foreign business handle GST?
Thanks to recent modernization, online businesses can generally handle GST themselves, without the need for a local tax representative.
Remote sellers should follow these 6 steps to comply with laws in a GST country:
- Check the country’s tax registration thresholds and monitor your sales.
- If necessary, register your company for GST.
- Verify your customer: Who are they? Where are they?
- Charge GST, if you need to.
- Provide detailed invoices (and keep record of them, too!)
- Submit quarterly returns.
We’ll explain each step for you.
Step 1: Check tax registration thresholds
A tax registration threshold is a fixed amount of money in that country’s currency. When your local sales pass the threshold amount, your business is required to register for taxes.
Thresholds apply to the total amount of sales you’ve made there in a year-long period. This could be the amount you sold in the last twelve months — or are projected to sell in the next twelve months.
Each country sets its own threshold rules.
- In Canada it is C$30,000 in B2C sales
- In Australia it is A$75,000 in B2C sales
- India doesn’t have a threshold at all! This means even if you make just one, tiny sale in the country, you must register and start complying with Indian GST.
Step 2: How does a foreign business register for GST?
Once you pass a threshold or predict that you will soon, you must register for GST.
Most countries offer a special online registration for overseas businesses, which you can access on the tax agency’s website. These online options are typically much more simplified than the traditional route.
Quick overview of how to register:
1.Go to the website of the country’s revenue and/or tax authority
2. Find the GST section
3. Look for any specific links about digital goods, remote sellers, or e-Commerce
4. Register your business by creating an account in the online portal
5. Receive your GST number!
Specific and step-by-step guidance can be found in the country guides below.
Step 3: What should you verify about your customers?
You need to verify two things about your customers: who they are and where they are. The first determines whether you add tax to the transaction, the second determines how much.
Determine who they are
When you make a sale, request the buyer’s GST number. Businesses will have one, private individuals will not.
Then you must validate the number. Unfortunately, some buyers may try to pretend they’re a business just to avoid the tax charge, so they could submit a phony tax ID. Many countries offer an online validation service or registry where you can check the number’s authenticity.
For example, Canada has a GST/HST registry and Australia offers ABN Lookup.
Determine where they are
In addition to requesting the buyer’s GST number, you should also verify their location. Location is important because some countries might have regional or local taxes added on top of their national GST.
For example, in Canada, some provinces have an extra layer of consumption tax that applies to remote sales. Familiarize yourself with the rules of British Columbia PST, Saskatchewan PST, and Quebec QST.
To prove to the government that you’re charging the right tax, you also need to prove where your customer is located. So, when making a sale, kindly request two of the following pieces of evidence:
- Billing address
- Location of the customer’s bank
- Country which issued the credit card
- The IP address location of the buyer’s device
- Country of the SIM card (in cases where the purchase was made on a mobile device)
Keep customer location records
Finally, document this location evidence and keep it stored safely, in case you need to verify future tax records. A cloud-based accounting and tax software can make collecting this evidence and storing it really easy; the collection of data is automatic, and there’s no risk of losing records.
Step 4: When does a foreign business have to charge GST?
Not always. It depends on where your customer is whether your customer has a valid GST registered number.
If they are not registered for GST, you do charge tax.
This means your customer is a normal end-consumer. It’s your average B2C transaction. You must charge tax on the sale, and then follow the rest of the protocol.
If they are registered for GST, you do not charge tax.
This means your customer is a fellow business, and therefore you’re exempt from charging and collecting tax. You don’t have to worry about it because the transaction is covered by the reverse-charge mechanism.
Reverse-charge mechanism? This also makes your life easier as a seller, if you are selling B2B. With this, the buyer is totally responsible for filing GST on the transaction. Since local companies can be reimbursed for any tax they spend on products to help run the business, it’s more efficient if they simply keep the money in the first place — rather than pay it to you and later claim it back from the government.
Step 5: What is a proper GST invoice? What are the best practices for tax invoicing?
A tax invoice includes quite a bit more information than a normal invoice. Each one should contain:
- Your business’ name and address
- Your business’ GST number
- Invoice date
- Invoice sequencing number
- Buyer’s name and address
- Buyer’s GST number. If you are using the reverse charge mechanism, you must also add the text “reverse charged”
- GST (amount and rate) applied to each item
- Final amount after tax is added
- The currency used
Even though that’s a lot of specific information, you can still organize everything so that it’s easy to read. Here’s an example of how to structure an invoice:
Keep each invoice in your records. If you ever receive a request from tax authorities, you’d likely have to make these records available within a couple weeks or months. So best practice is to keep digital files in a cloud-based storage system, or simply within your accounting/tax software if you use one.
Step 6: How to submit GST returns
When to file
When you registered for GST, the country likely assigned you a filing frequency. Quarterly returns are most common for overseas online businesses, but if you are a particularly high earner, you might need to file every month.
From the last day of each quarter, you have a set number of days to file and pay. It depends on the country.
For example, Australia uses the 28th of the month following the end of the quarter. So the deadlines there are as follows:
- 28 April, for first quarter ending 31 March
- 28 July, for second quarter ending 30 June
- 28 October, for third quarter ending 30 September
- 28 February, for fourth quarter ending 31 December (extra time on this one!)
How to file
In countries where you’ve registered online, you can submit your return online as well. You’ll need your invoice records to complete the filing. Better yet, have sales tax reports ready with all the figures you need to enter.
Note: If you made any sales in a different currency (e.g. you sold in US dollars, but you’re filing in Australia which uses AUD), you will need to convert those amounts to the official currency of the country. Use the local banking authorities’ official exchange rates.
Based on the information you enter, the online portal will automatically calculate how much tax you owe. Then you’ll receive instructions on how to complete the payment.
Of course, it’s always best practice to maximize your business tax returns. Then you can reinvest your savings into this amazing global growth you’re achieving!
Can a foreign business just ignore GST?
Legally, no. If you choose to not comply with the law, you risk getting caught by tax authorities. With that comes paying for years of back-taxes plus penalties for not following the rules. A blow like that could potentially ruin a small business. Moreover, if it turns out you’ve intentionally broken the law, you could find yourself in court. No one wants to be convicted of fraud, right?
Last but not least, you could look at it as a matter of ethics: if you enjoy the privilege of selling to customers in their country, shouldn’t you also pay the respect of following their laws? It’s just the right thing to do.
As they say, peace of mind is priceless.
This sounds complicated. What can help online businesses handle GST?
Okay, so maybe this all wasn’t as simple as we hoped. The best way to streamline GST is to use a cloud-based accounting tool that automates the entire process — from charging the correct amount of tax to collecting payment to issuing the proper invoice. All of your records are kept safely online for you, even if your computer crashes.
Quaderno handles all of this tax compliance for you, so that you can spend your time focusing on dominating the global market — on bettering your product, getting to know your customers, taking care of your employees, or whatever else matters more than fretting over tax technicalities.
In fact, Quaderno can do all of the following:
- Calculate the right amount of tax to charge each customer, right on your checkout page.
- Automatically verify the GST numbers you receive from customers.
- Collect and store the customer location evidence that you need to get from every sale.
- Create and send invoices in multiple languages and currencies.
- Send invoices automatically.
- Help ensure you don’t overpay on your returns.
- Notify you when you’re about to pass a threshold and need to register in a new country.
- Notify you when any tax policies or rates change, so that you’re always in the loop.
And that’s only how Quaderno can help with GST. When it comes to EU VAT, US sales tax, and others around the world, or simply everyday billing and accounting — Quaderno jumps through all the hoops for you and presents your business data in a way that’s easy to understand. Sign up for a free trial and see how Quaderno can cut through all the bureaucracy for you.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.