FinanceApr 6, 20263 min read
GST and VAT — What the Math Actually Is
Adding tax to a price and extracting tax from a gross price are not the same operation. Here is the two-minute version.
GST, VAT and sales tax all work the same way mathematically. The formulas are simple; it's the direction (add vs. extract) that trips people up.
Adding tax to a net price
If the net price is 100 and the tax rate is 18%:
- Tax = 100 × 0.18 = 18
- Gross = 100 + 18 = 118
Extracting tax from a gross price
Given a gross of 118 at 18%, the net is not 118 × 0.82. It's:
- Net = 118 ÷ (1 + 0.18) = 118 ÷ 1.18 = 100
- Tax = 118 − 100 = 18
Getting this wrong on an invoice is a common source of accounting drift.
Use a calculator
Our GST/VAT Calculator does both directions with one toggle. For sales tax specifically, use the Sales Tax Calculator.
Multi-tier taxes
Some jurisdictions apply state + federal tax. Compute them additively (both on the net) unless local rules say otherwise. Always show tax as a separate line on invoices.