Income Tax vs. GST: How They're Different

What is GST tax exactly? GST, goods and services tax,  is a consumption tax that applies to a wide range of goods and services. Like value added tax (VAT), GST is charged at every stage in the production process. That means that just about everyone pays GST, from ordinary consumers to large corporations. GST is an indirect tax.

Under certain conditions, businesses are obliged to charge GST tax on their goods or services. In such cases, the business must also register for GST and file regular returns. 

Income tax is a direct tax that is applied to an individual’s salary or on companies. So, what's the difference between income tax vs GST?

GST compliance compared to complying with income tax

Most individual consumers don’t have to concern themselves with GST compliance rules. The GST consumption tax is included in the price of goods or services they pay for. The onus to charge and account for GST lies with the merchant. 

Similarly, in many cases, an individual’s income tax is calculated by their employers. The employer is obliged to calculate, withhold and account for the relevant income tax. That said, many countries require taxpayers to file regular tax returns, including details of income tax. 

Moreover, in some cases, you will be required to manage income tax yourself, notably in the case of sole proprietors and freelancers.

GST compliance for businesses

Not all businesses are required to charge GST on their goods or services. In most countries where GST applies, a business must register when its taxable supply of goods exceeds a specific annual threshold. That threshold is different in each country and is set in the local currency.

Once they reach the GST threshold, businesses are obliged to register for GST and file regular returns.

Why is income tax called a progressive tax?

Besides one being a direct tax and the other an indirect tax, the tax rate also differs between income tax vs. GST. Income tax is a progressive tax in many countries. That means that the tax rate increases as the amount being taxed increases. In other words, people with higher incomes pay a higher rate of income tax.

GST tax rate does not follow that principle. Similar to a sales tax, The rate of GST is fixed, regardless of the income of the person or business paying the GST. In economic terms, the burden of paying GST falls disproportionately on those with lower incomes. 

That said, there may be different rates of GST on different goods. Essential items, such as staple foods and medicines, may even be exempt from GST entirely.

Who can reclaim GST?

In countries with a GST system, the tax is encountered very commonly. All you need to do is go to a shop and purchase an item, and you will, in many cases, pay GST.

That is quite different from income tax, which only applies to individuals and entities with a taxable income.

That said, while GST is extremely common, most consumers cannot reclaim GST. It is simply part of the cost of a good or service. However, GST-registered businesses can recover GST incurred on business expenses. In fact, optimally managing GST can be a central part of managing cash flow and reducing expenses. 

Why businesses need better GST solutions

It's very important to understand the difference between income tax vs. GST or GST tax vs VAT. However, managing these taxes is critical. For businesses, managing GST regulations and compliance issues can be extremely complex. This is especially true for companies that operate globally, which potentially have VAT and GST obligations in multiple countries.

How can companies maximize GST recovery opportunities while ensuring they stay 100% compliant everywhere they operate?

You need specialist VAT and GST advice, supported by world-class compliance technology. As VAT and GST recovery and compliance leaders, VAT IT can tailor a compliance solution, especially for your business. Get in touch with VAT IT’s VAT and GST advisory experts for a careful analysis of your company's VAT compliance needs.