Definition
Tax-inclusive pricing means the listed price already contains sales tax, VAT, or GST, so the customer pays exactly the price shown. Tax-exclusive pricing means tax is added on top of the listed price. An invoice must make clear which method it uses so the tax amount can be calculated and reported correctly.
Also called: Tax-inclusive price, Tax included, Tax-exclusive pricing
Tax-inclusive pricing in practice
Consumer prices in the UK, EU, Australia, and New Zealand are normally shown tax-inclusive. In the United States and Canada, prices are usually tax-exclusive, with sales tax added at checkout or on the invoice.
To find the tax inside a tax-inclusive price, divide the price by 1 plus the tax rate. At 20 percent VAT, a 120 pound inclusive price contains 100 pounds net and 20 pounds tax. Simply taking 20 percent of 120 gives the wrong answer.
Business-to-business invoices are usually tax-exclusive so the buyer can see the net cost and reclaimable tax separately. Whichever you use, show the tax amount on the invoice.
Example
A Sydney cafe sells a $5.50 coffee including 10 percent GST. Dividing $5.50 by 1.1 gives a net price of $5.00, so the GST included is $0.50.
Frequently Asked Questions
How do I calculate tax from a tax-inclusive price?
Divide the price by 1 plus the tax rate to get the net amount, then subtract it from the price. At 10 percent, a $110 inclusive price is $100 net and $10 tax.
Should my invoices be tax-inclusive or tax-exclusive?
Follow local custom and your clients' expectations. Businesses usually expect tax-exclusive prices; consumers in VAT and GST countries expect tax-inclusive ones. Either way, show the tax separately.
Related terms
- Sales tax Sales tax is a consumption tax added to the price of goods and some services at the point of sale, collected by the seller and remitted to the state or local government.
- VAT VAT (value added tax) is a consumption tax charged at each stage of the supply chain on the value added, used in the EU, UK, and more than 160 other countries.
- GST GST (goods and services tax) is a broad consumption tax applied to most goods and services, functioning like VAT.
- Net amount The net amount is the value left after deductions, or the price before tax, depending on context.
- Gross amount The gross amount is the total of an invoice or line before deductions are taken off.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.