Key Differences between VAT and GST

Ashish M. Shaji

01 Mar, 2021

With the introduction of GST, Goods and Services Tax, the indirect taxation system like VAT (Value added Tax), excise duty, and service tax has been overshadowed. GST was implemented on 1^st July 2017 with a view to eliminate cascading effect of taxation. In this article, we shall look at some of the key differences between VAT and GST but before that, let’s have a basic understanding of cascading effect of taxation.

What is cascading effect of taxation?

Cascading effect refers to an instance where a tax on tax is levied on a product at every step of sale. Such tax levied is levied on a value which includes tax paid by previous buyer, thereby making the end consumer pay tax on an already paid tax.

What is Value Added Tax?

VAT was introduced in 2005 to replace the earlier sales tax system. VAT is an indirect tax that is levied at every stage of the supply chain. It is applicable to some essential products such as diesel, petrol, and alcohol for human consumption, which cannot be taxed as per the GST Act^[1].

VAT was earlier introduced in order to make India a single integrated market so that a unified rate can be achieved for products and services. However, the taxation system had a few disadvantages because of many indirect taxes like VAT. On 2^nd June 2014, VAT was implemented in all states and UTs of India except Lakshadweep Islands and Andaman and Nicobar Islands.

Disadvantages of VAT-

Here are a few disadvantages of Value Added Tax-

• Different VAT rates in different states;
• Different VAT laws in every states;
• Cascading effect of taxes; and
• Not possible to claim Input Tax Credit on service under VAT.

VAT and GST- Differences

Both taxation system VAT and GST have some key differences. Below we have specified these differences.

• GST is taxed on both goods and services, whereas VAT is taxed on the sale of goods (service tax for services);
• GST is applicable on supply of goods and services, but VAT shall apply at the time of sale of goods;
• In case of GST, tax rates are uniform all over India, but under VAT it has different rates and laws in each and every state;
• When it comes to authority over tax in case of GST, the tax collected is equally shared between the state and central government.  In case of VAT, the tax collected is confined to the state where the sale takes place;
• For paying GST, both offline, as well as online methods, are available. It may be noted that online payment is necessary in case the GST payable is more than 10000 rupees. However, in case of VAT, only offline payment can be made;
• This is one of the critical differences between VAT and GST that the benefit of input tax credit is available under GST. It means a taxpayer can claim the credit on the supplies received. In case of VAT, no input tax credit benefit is available on customs duty paid;
• GST has similar set of compliances for the movement of goods between states, but VAT has different set of compliances for the movement of goods from one state to other;
• The consumer state collects the tax under GST, but the seller’s state collects the tax in case of VAT;
• Filing of return happens every month under GST, but the filing dates in case of VAT are 10, 15, and 20 of the succeeding month; and
• GST is a transaction-based tax system, but VAT is a summary-based tax system.

What are the advantages of GST over VAT?

The advantages of GST are as follows:

• Elimination of cascading effect of taxes

GST is a comprehensive indirect tax. It was designed to bring the indirect taxation under one. It is expected to eliminate the cascading effect of taxes.

• Composition scheme for small business

Under GST, small businesses can benefit as it provides an option of lowering taxes by utilizing the composition scheme. This has helped in bringing down the burden of tax and compliance for small business.

• Simplified online procedure

The entire GST registration process is simple and online. Start-ups have benefitted from this as they don’t have to go around to get registrations.

• Improved efficiency of logistics

The logistics industry had to maintain multiple warehouses across states earlier. This was to avoid different taxes on inter-state movement. These warehouses had to function below their capacity, thereby increasing operating costs. Now under GST, these restrictions have lessened. Warehouse operators and e-commerce aggregators have preferred setting up their warehouses at strategic locations instead of every other city. The business involved in the supply of goods through transportation have benefitted as unnecessary logistics costs have gone down.

How GST and VAT are calculated?

According to the popular economists, VAT and GST are just two new names for one tax however, when considered closely you can find the contrast. The below mentioned example can help in understanding GST, VAT calculation.

 Under VAT-

If a consultant charged 15% professional tax on services rendered worth 1 lakh rupees, then the output taxable liability would be 1lakh x 12% = 15000 rupees.

In case the office supplies were bought for 30000 rupees, paying 5% as VAT will amount to 1500 rupees.

In this case, the whole amount of 16500 should be paid, as tax paid on the supplies from output tax liability on services rendered under VAT can’t be deducted.

Under GST-

If a consultant charged 18% professional tax on services rendered worth 1 lakh rupees, then the output taxable liability would be 1lakh x 18% = 18000 rupees.

In case the office supplies were bought for 30000 rupees, paying 5% as VAT will amount to 1500 rupees.

In this case, the payable amount shall be 16500 rupees. Unlike VAT, GST has the facility to deduct tax paid on supplies from the output tax liability on services rendered.

Conclusion

Therefore it can be concluded that there is a significant difference between VAT and GST. There are some products that are not included in GST, but with the passage of time, there can be addition under GST regime.

Read our article: Casual Taxable Person under GST