VAT and GST basics for small online sellers in the UK and India

Sales taxes catch out more small online sellers than almost anything else. Cross a threshold without noticing and you can owe tax on sales you have already made, with no way to recover it from customers. Register too early and you may add 20% to your prices before your market can bear it. Knowing the rules for your country, and checking your figures every month, avoids both problems.

This guide covers the basics of UK VAT and Indian GST for small sellers of goods online. It is general information, not tax advice. Thresholds and rules change, so check the current position on GOV.UK or the official GST portals, and speak to an accountant before you act.

How VAT and GST work

VAT in the UK and GST in India work in a similar way. A registered business adds tax to its sales (output tax) and can usually reclaim the tax it pays on business purchases (input tax, called input tax credit in India). It pays the difference to the tax authority. The tax is meant to fall on the final consumer, with each business in the chain collecting it and passing it on.

Two points matter for small sellers. First, once you are registered, the tax you collect is not your money, so your real revenue is the price excluding tax. Second, registration rules are triggered by turnover measured in specific ways, and by certain types of sale regardless of turnover.

UK VAT: when you must register

The UK VAT registration threshold is £90,000 of taxable turnover. You must register if either of these applies:

• your total taxable turnover for the last 12 months goes over £90,000 (a rolling 12 months, not your financial year), or
• you expect your taxable turnover to go over £90,000 in the next 30 days alone.

Taxable turnover means everything you sell that is not exempt from VAT or outside its scope. It includes zero-rated goods, so a seller of children’s clothing still counts those sales towards the threshold.

Under the rolling test, you must register within 30 days of the end of the month in which you went over. Your registration takes effect from the first day of the second month after you went over. GOV.UK’s example: if you went over on 15 July, you must register by 30 August, and your effective date is 1 September.

You can register voluntarily below the threshold, which can make sense if most of your customers are VAT-registered businesses that can reclaim the VAT, or if you pay a lot of VAT on your own costs.

The standard rate is 20%, with a reduced rate of 5% for some items (such as children’s car seats and household power) and a zero rate for others (such as most groceries and children’s clothing). Some items, such as postage stamps and financial transactions, are exempt, which means they carry no VAT and do not count towards taxable turnover.

UK rules for sellers based abroad

The £90,000 threshold is for UK-established businesses. If you and your business are based outside the UK and you supply goods or services in the UK (or expect to within the next 30 days), there is no threshold: you must register whatever your turnover. The only route to an exemption from registration is if all your taxable supplies are zero-rated.

This matters for Indian sellers who hold stock in the UK or sell to UK customers in other ways. Special rules also apply to goods sold through online marketplaces and to low-value imports, so read the GOV.UK guidance for overseas sellers before you start, and take advice on which rules cover your set-up.

Indian GST: thresholds and compulsory registration

In most states, a business supplying only goods is exempt from GST registration while its aggregate turnover in a financial year stays at or below ₹40 lakh. This higher limit, in place since 1 April 2019, does not apply to intra-state suppliers in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura and Uttarakhand, or to suppliers of ice cream, pan masala and tobacco products, where a lower limit applies. Businesses that supply services have a different threshold, so check the current figure that applies to you.

The threshold does not help every online seller, because Section 24 of the CGST Act requires some businesses to register regardless of turnover. Two cases matter most for small online sellers:

• Inter-state supplies. A seller of goods who ships to customers in another state must generally register, even with low turnover.
• Selling through an e-commerce operator that collects tax at source (TCS). Sellers on such marketplaces must generally register. Since 1 October 2023, there is an exception: small suppliers of goods whose turnover stays within the state threshold can sell through these platforms without registering, provided they supply only within one state, hold a PAN, and obtain an enrolment number through the GST portal before selling.

GST rates depend on the product, and they are revised from time to time by the GST Council. Check the current rate for each item you sell on the official GST and CBIC sites rather than relying on an old price list or a competitor’s listing.

Two worked examples

An example (illustration only), UK: a jewellery seller tracks her rolling 12-month sales at each month end. At the end of June the total is £86,000. During July it passes £90,000, reaching £91,500 by month end. She must register by 30 August, and from 1 September she charges 20% VAT. If she keeps her £30 earrings at £30 including VAT, her revenue per pair falls to £25, with £5 going to HMRC. She needs to decide before September whether to raise prices, absorb the cost, or do some of each.

An example (illustration only), India: a home decor seller in Maharashtra has turnover of ₹25 lakh.

• If she sells only through her own website to customers in Maharashtra, she is below the ₹40 lakh goods threshold and need not register.
• If she starts shipping to customers in Karnataka, she makes inter-state supplies and must generally register.
• If she sells through a large marketplace that collects TCS, she must register unless she uses the enrolment route, which limits her to customers in Maharashtra.

Practical steps and common mistakes

1. Track turnover monthly on the basis the law uses: a rolling 12 months for UK VAT, the financial year (aggregate turnover) for Indian GST.
2. Set an alert at around 80% of the threshold so you have time to plan prices and systems.
3. Check whether any of your sales trigger registration regardless of turnover: being based outside the UK while selling there, or inter-state and marketplace sales in India.
4. Decide how you will price once registered, and model the effect on margins.
5. Set up your accounting software and invoices for tax before your effective date.
6. Keep records of sales, purchases and tax paid from day one.

Common mistakes include measuring the UK threshold on the financial year instead of a rolling 12 months, leaving zero-rated sales out of taxable turnover, assuming a marketplace handles your tax when it does not, quoting margins on tax-inclusive prices, and starting inter-state shipping in India without registering first. Each one can create a bill for tax you never collected, so check early and get professional advice when your situation is not straightforward.