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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 1st 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.
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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.
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.
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 2nd June 2014, VAT was implemented in all states and UTs of India except Lakshadweep Islands and Andaman and Nicobar Islands.
Here are a few disadvantages of Value Added Tax-
Both taxation system VAT and GST have some key differences. Below we have specified these differences.
The advantages of GST are as follows:
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.
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.
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.
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.
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.
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.
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 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.
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
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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