What is the Difference Between GST and VAT

What is the Difference Between GST and VAT

The Goods and Services Tax (GST), which has replaced the Central and State indirect taxes such as VAT, excise duty and service tax, was implemented from 1st July 2017. 

In this article, you can understand the differences between VAT and GST and their implications. GST has eliminated the cascading effect of taxes on the economy.


Meaning of cascading effect of tax

                                                     

Cascading effect is when there is a tax on tax levied on a product at every step of the sale. The tax is levied on a value that includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax”. Let us now understand what the Value Added Tax (VAT) is and how it impacted the Indian economy.

What is VAT?


Value Added Tax (VAT) is an indirect value-added tax that was introduced into the Indian taxation system on 1st April 2005. 

A value-added tax (VAT) is a consumption tax levied on a commodity whenever it adds value at any point in the supply chain, from production to sale. The amount of VAT that the consumer pays is based on the cost of the product, minus any previously taxable costs of products used in the product.

As a taxation concept, VAT replaced Sales Tax. VAT was introduced to make India a single integrated market. However, it was introduced at the state level. On 2nd June 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.  

For interstate supplies, CST or Central Sales Tax was imposed. CST applies to the sale of goods levied by the Central Government. It is collected and retained by the state where the tax is collected. 

Disadvantages of VAT

  • Cascading effect of taxes
  • It was not possible to claim Input Tax Credit (ITC) on service under VAT
  • Different VAT rates in different states
  • Different VAT laws in every state
  • The input of CST cannot be adjusted against VAT and vice versa

What does GST bring in that VAT could not?

Designed to be a single, comprehensive, destination-based taxation concept, Goods and Services Tax (GST) unifies the entire country in terms of how the tax is collected. GST has revolutionized the Indian taxation system. GST intends to further eliminate the concept of “tax on tax”.  

Benefits of GST Implementation

  • Removal of cascading effect of tax
  • Simple online procedure
  • Lesser compliances
  • Defined treatment for e-commerce companies

Let us look at an example  

Consider a consultant providing services to his clients. 

Under VAT regime: The consultant would have charged 15% service tax on services of Rs. 70,000. So, his output tax was Rs. 70,000 x 15% = Rs.10,500. Then, if he purchased office supplies for Rs. 25,000 paying 5% as VAT which would amount to Rs. 25,000 x 5% = Rs. 1,250. He had to pay Rs. 10,500 output service tax without getting any deduction of Rs. 1,250 VAT already paid on stationery. His total tax outflow is Rs. 11,750. 

Under GST: GST on service of Rs. 70,000 @18% = Rs. 12,600. Now, subtract GST on office supplies (Rs. 25,000 x 5%) = Rs. 1,250. Therefore, the net GST liability to pay is Rs. 11,350  

Conclusion

By implementing GST on goods and services, the economy is improving through the elimination of the cascading system of tax and streamlining the business process in India.  


    • Related Articles

    • What Is the Goods and Services Tax (GST)?

      The goods and services tax (GST) is an indirect sales tax that is applied to the cost of certain goods and services. The business adds the GST to the price of the product, and a customer who buys the product pays the sales price plus the GST. The GST ...

    • Implication of GST on FMCG Sector

      INTRODUCTION Fast moving consumer goods (FMCG) is the 4th largest sector in the Indian economy. There are three main segments in the sector – food and beverages, healthcare and household and personal care which accounts for almost half of the sector. ...

    • GST Applicability & Tax Rates on Real Estate

      The Goods and Services Tax (GST) has significantly impacted the real estate sector in India, streamlining various indirect taxes into a single, unified structure. However, understanding GST’s implications in the real estate sector can be challenging ...

    • GST Applicability & Tax Rates on Food

      GST on Food We help you understand all about GST on food items, GST on restaurants, and how a restaurant bill will look under GST. We also explain the different GST rates applicable on foods in hotels vs. the GST rate on foods in standalone ...

    • When was Goods & Service Tax Started in India?

      India's two of the major problems are tax evasion and corruption. So, to come out of these problems a big step has to be taken by the government which is in the form of GST. India's tax system is more complex and GST will help in the simplification ...