What is a Goods and Services Tax?

Patrick Roland
Patrick Roland
Canada implements a goods and services tax within the country.
Canada implements a goods and services tax within the country.

A goods and services tax (GST) is a type of consumption tax that is added to the purchase price of certain products or services, such as clothing, food, and gasoline. The money from the tax is typically collected by the business selling the taxed product or service, and the revenue is usually forwarded to the local government. Revenue from GST is most often used to improve the local community in various ways, such as generating revenue that can be used to enhance the operations of schools located within a city. Depending on the country where the tax is charged, the system may be set up as a type of value added tax, meaning a tax is charged each time the product or service is sold at a higher price, creating the difference between a GST and a one-time sales tax. Arguments for and against this tax system exist, especially in countries where the tax is applied in addition to income tax.

Worldwide Variations

In countries that have implemented this tax system, such as Australia, Canada, New Zealand, and Singapore, the GST rate is generally a fraction of the overall cost of the item. In some countries, the tax was created to replace a hidden manufacturer's sales tax, which was often charged at a much higher rate than the replacement. This change in tax systems puts the burden of taxation on the shoulders of the consumer, as opposed to the producer, of goods and services.

The rate of GST varies greatly among countries and is set by a government's revenue authorities. Rates can range anywhere from a barely-noticed percentage to a significant portion of the overall price of an item. Funds collected by a goods and services tax are used by these governments in different ways, from helping subsidize health care to paying for general government operational costs.

Just as the rate of a goods and services tax may vary between governments, the products on which it is charged and when it is charged may also vary. One common variation is whether the rules of value added tax (VAT) applies to the goods and services tax of a country. Essentially, the general rule of a value added tax states that any added value an original buyer gains by later selling the product will also be taxed when the product is sold. For example, if a man buys a pair of shoes for $50 US Dollars (USD), he is taxed for that purchase, and if later he sells them for $75 USD, he created an added value of $25 USD. He will be charged a tax on the added value amount of $25 USD, and the person buying the shoes will be charged a tax on the entire $75 USD.

In Australia, New Zealand, and Singapore, to name a few, the GST is charged like a VAT in that a GST will be charged each time a product is sold at a higher value. As a result, it is possible for more than one person or party to pay a goods and services tax on the same product or service. In Canada, the VAT system is essentially avoided by allowing taxpayers to receive GST deductions on products that were later sold, putting the responsibility for paying the GST on the final buyer.

An Ongoing Debate

Public opinion of the goods and services tax varies greatly and has been the source of heated controversy in some nations. Citizens who support the tax often reference the positive aspects for the community and the nation as a means of financial support. Many feel that implementing this tax system could encourage citizens to save more and spend less, possibly resulting in a more efficient economy. Others feel that a higher tax rate on goods and services could be difficult for people of the lower class to pay, especially if it is required in addition to an existing income tax.

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    • Canada implements a goods and services tax within the country.
      By: Anna
      Canada implements a goods and services tax within the country.