Understanding Sales Tax and VAT
Sales tax is a consumption tax imposed by the government on the sale of goods and services. While the calculation is mathematically simple, terminology varies by region.
Net Price vs. Gross Price
It is crucial to distinguish between these two values when reviewing invoices:
- Net Price: The price of the product or service before tax. This is also often called "Subtotal" or "Excl. Tax" price.
- Gross Price: The final price the customer pays, including the tax component. This is the "Incl. Tax" price.
Global Terminology
While the math is the same, the name changes based on where you are doing business:
- USA & Canada: Usually referred to as "Sales Tax". It is added at the point of sale (POS).
- Europe & UK: Usually referred to as "VAT" (Value Added Tax) or "GST" (Goods and Services Tax). Prices on shelves are usually inclusive of tax.
- Australia & New Zealand: "GST" is standard.
- India: "GST" and "CGST" (Central GST) are often broken out separately.
How to Calculate Manually
Tax Amount = Price × (Tax Rate / 100)
Gross Price = Net Price + Tax Amount
Reverse Calculation
If you only know the final price (Gross) and tax rate, you can find the Net Price using this formula:
Net Price = Gross Price / (1 + (Tax Rate / 100))