written by Khatabook | November 15, 2021

Difference Between VAT and GST

Goods and Service Tax (GST) is a reform that gave the Indian Tax Collection System its exceptional philosophy of 'one country, one tax.' The implementation of GST has eliminated many indirect taxes in India, including Value Added Tax (VAT), Service charge, Octroi, and Excise Duty. These different types of taxes resulted in individuals paying tax on tax. However, with GST, the undesirable impact of tax was cut down in the economy. Therefore, by understanding the difference between VAT and GST in India, the impact of both these taxes and their impact can be understood. 

What is the difference between VAT and GST

Definition of VAT

Each commodity goes through various phases of creation, development and processing before coming to the purchaser. At each stage of the creation, changes are made in the supply chain. Value Added Tax (VAT), an indirect tax, is an expense added at each stage of the product movement. This tax added on all the stages were eventually borne by the last buyer. 

History of VAT

  • Value Added Tax or VAT was independently designed by two individuals named Wilhelm Von Siemens and Thomas S. Adam in the early 20th century.
  • Germany and France were the first two nations to implement VAT. 
  • This tax was perceived as an improved version of sales tax in the European countries.
  • Various countries incorporated the VAT during the 1960s, 1970s and 1980s.
  • VAT was introduced in India on April 1, 2005, and it replaced the existing general sales tax in India. 
  • States such as Rajasthan, UP, Gujarat, Madhya Pradesh and Chattisgarh were excluded from implementing VAT initially but later adopted the tax. 

The Difference Between VAT and Income Tax

Like Income Tax, VAT depends on the increment in the worth of goods and services at each phase of creation or appropriation. In any case, there are some significant differences.

  • The end retailer generally has to pay VAT tax in India even though it is levied on different stages of goods or service production. Whereas income tax is imposed on the taxable income of individuals.
  • The standard rate of VAT was applicable to all goods and services whereas Income tax differ as indicated by the tax slabs. 
  • VAT is required to be paid by the end customer whereas Income Tax is paid by individuals to the government.  
  • VAT is a flat tax, i.e., a single percentage rate was applied. On the contrary, income tax is a progressive tax where individuals with higher income have to adhere to higher tax slabs

Which tax has been replaced by GST?

Value Added Tax was introduced in 2005 as a replacement for the earlier ‘Sales Tax’ system. It is an indirect tax levied at every stage of the supply chain and applies to some key products such as petrol, diesel and alcohol for human consumption that is not taxable under the GST Act.

VAT was introduced to make India a single integrated market so that a unified tax rate for products and services is possible. However, the taxation system had drawbacks due to many indirect taxes. This led to the elimination of the India VAT tax which was replaced with GST from July 2017.

Drawbacks of VAT

  • Cascading effect of tax system.
  • Input Tax Credit (ITC) cannot be claimed for services under VAT.
  • Different VAT rates are applicable in other states.
  • Also, there were different VAT laws for different states.

Definition of GST

Goods and Services Tax or GST was presented as another association in the type of tax collection framework that supplanted most Indirect Taxes in India. The Act, which commenced on 1st July 2017, is a multi-stage, comprehensive, destination-based tax charge.

Under GST, the expense is collected at each retail location. Integrated GST will be demanded between state deals, and on account of intrastate supplies, CGST and SGST will be charged.

Types of GST

The four distinct types of GST are given as under:  

  • State Goods and Services Tax: SGST is charged for offering services and goods inside a state. 
  • Central Goods and Services Tax: CGST is charged on intrastate services and goods.
  • Union Territory Goods and Services Tax: UTGST is required on the services and goods in any Union Territories in the nation, viz. Daman and Diu, Andaman and Nicobar Islands, Dadra and Nagar Haveli, Chandigarh, and Lakshadweep. UTGST is collected alongside CGST.
  • Integrated Goods and Services Tax: IGST is charged between state exchanges of services and goods. 

Who is Eligible for GST? 

The following people should enlist for Goods And Services Tax: 

1. E-commerce businesses or operators.

2. People who supply through web-based business operators. 

3. People who pay charge according to the reverse charge mechanism. 

4. Non-Resident individuals who undertake transactions.

5. Organisations that have a turnover of over Rs 40 lakhs. It is Rs 10 lakhs for NE and hill states.

Enrollment of GST

  • It is compulsory for all Service suppliers, purchasers, and dealers to get registered under GST. 
  • A business that makes Rs 20 lakhs and more in a financial year are liable to register under GST. 
  • The enrolled individuals or organisations will get a one of a kind enlistment number called Goods and Service Tax Identification Number or GSTIN. 

Also Read: Things You Need to Know About GST

How to check your GSTIN?

Goods and Service Tax Identification Number or GSTIN is a 15-digit code that is given to citizens or business entities. The GSTIN will be given on the basis of the state you live in and the Permanent Account Number or PAN. 

The following depicts how you can understand your GSTIN number:

  • The first two numbers depict the state code of the registered person
  • The next ten numbers are the PAN of the registered person
  • The following number is the entity number of the PAN
  • The next character Z is a default character
  • The last number is a check code for detecting errors. It can be either an alphabet or a number

The benefits of having GSTIN are:

  • With GSTIN, it’s easy to check for authenticity of a business
  • It has an easy verification process
  • Prevents fraudulent transactions
  • You can get discounts by claiming GST input tax credit
  • Profitability in credits can be obtained using this number 

GST Returns

  • A GST Return is a document that contains data about the pay that a taxpayer should record with the authorities. 
  • GST returns is used for the calculation of the net tax liability of an individual or business.
  • This data is utilised to process the taxpayer's assessment risk. 
  • Under GST, enrolled sellers should document their GST to get back insights regarding their buys, deals, input tax break, and yield GST. 
  • Organisations are relied upon to record two monthly returns as well as yearly returns.

How has GST removed VAT’s Cascading Effect? 

This tax collection framework, GST was established by eliminating the VAT system which was resulting in a cascading tax effect. The negative impact could be identified on the end buyer who had to pay the tax imposed on all stages of the production of goods or services. 

However, with GST this negative impact has been eliminated. This tax has supplanted various state-level expenses which have proved to be beneficial for various businesses as well as consumers. 

Advantages of GST: 

The implementation of GST has resulted in numerous advantages such as:

  • It has reduced tax evasion and corruption in tax administration
  • The process of GST registration and its uses are easy to understand
  • GST is a technologically driven process, therefore, increasing credibility 
  • It has lesser compliances 
  • GST has a higher exemption limit
  • It has aided significantly in the process of import and export
  • The process of e-commerce business has been made easier because of GST

What is the advantage of GST over VAT? 

The foremost advantage of Goods and Services Tax (GST) over Value Added Tax (VAT) is that it eliminates illegal practices with its single compliance system. Apart from the eradication of the negative impact of cascading tax, GST has significantly reduced the tax burden on taxpayers. Most importantly, it eliminates the various indirect tax associated with VAT. It is a transparent tax, thereby reducing the cost of doing business. Therefore, GST has proved to be beneficial for not only individuals but also business entities. 

The Main Difference Between VAT and GST

The principle contrasts among VAT and GST could be perceived from the accompanying table:

Differences

VAT regime

GST regime

Taxable Event

  • VAT is imposed on the sale of goods.

 

  • It is a summary based tax that occurs on the sale of goods.
  • GST is imposed on every supply, and supply includes goods and services.

 

  • It is a transaction-based tax that occurs on the supply point.

Taxes and Laws in each state

  • VAT rates vary in each state.
  • Uniform duty rates all over India 

 

  • For States, we have State GST Act (SGST)
  • For intrastate supplies of services or goods, there is Central GST Act (CGST)
  • For provisions made between the states, we have the Integrated GST Act (IGST). 
  • For Union regions engaged with an inventory exchange, we have Union Territory GST Act (UGST).

Registration Policy

  • Individuals or business entities need to register if they have a turnover of less than Rs 10 lakhs.
  • Individuals or business entities need to register if they have a turnover of more than Rs 20 lakhs.

Authorities that regulate Tax

  • Is a tax collected by respective state legislatures.

 

  • Is collected by the seller’s state.
  • Goods and Service Tax is equally shared by the state/central government.

 

  • Is collected by the consumer’s state.

Input Tax Credit (ITC)

  • No ITC is available for customs duty paid.
  • ITC is available under GST where a taxpayer can claim the credit on supplies received.

Payment Mode

  • Can be paid only offline.
  • Can be paid both online (mandatory if GST to be paid is more than Rs 10,000) and offline.

Abidances

Goods' movement : 

  • Compliance for the movement of goods varies in different states. 

Returns: 

  • The dates for return filing are the 10th, 15th and 20th of next month for each preceding month. 

Goods' movement : 

  • Compliance for the movement of goods between states is similar.

Improved on Returns: 

  • The return filings are to be done every 20th of the next month for each preceding month. 

Also Read: What is GST Amnesty Scheme - GSTR-3B Late Fee Relief, Benefits, Eligibility and Last Date

Calculation of GST and VAT

(I) Under the VAT Regime

  • Assume a specialist charged a 15% expense on products or services delivered worth Rs. 10,000. 
  • Consequently, the output tax will be Rs. 10,000 x 15% = Rs. 1500. 
  • By then, if the workplace supplies were purchased for Rs. 3000, paying 5% as Value Added Tax will add up to Rs. 150 (Rs. 3000 x 5%). 
  • For this situation, the entire sum, Rs. 1650 (Rs. 1500 Rs. 150), is to be paid as the duty paid on provisions from the charge on goods or services delivered under the VAT framework. 

(ii) Under GST Framework

  • Assume a specialist charged 18% expense on services delivered worth Rs. 10,000. 
  • Consequently, the output tax will be Rs. 10,000 x 18% = Rs. 1,800. 
  • If the workplace supplies were purchased for Rs. 3,000, paying 5% as GST will add up to Rs. 150 (3,000 x 5%). 
  • For this situation, the sum payable will be Rs. 1650 (Rs. 1800 - Rs. 150).
  • This calculation of GST is not like VAT since GST is deducted from the expense paid on provisions of the goods or services delivered.

Conclusion

The cascading effect of tax has been significantly reduced with the implementation of GST. GST has replaced indirect taxes like VAT in India. Vat implementation in India resulted in paying taxes for every stage of product movement whereas, with GST, the consumers only have to pay for tax on the end product. Therefore, we hope you have understood the difference between VAT and GST through this article. Download the Khatabook app for more information.

FAQs

Q: What is an E-way Bill?

Ans:

E-way Bill is an electronic document that is generated to show proof of goods movement. You can generate the bill from the GST portal.

Q: Can we claim Input Tax Credit on VAT?

Ans:

Input Tax Credit cannot be claimed in VAT.

Q: Maximum GST rate applicable in India?

Ans:

The maximum GST rate applicable in India is 28% IGST and 14% CGST and 14% SGST/UTGST.

Q: Why was VAT discontinued?

Ans:

There were several reasons for the discontinuation of VAT, but the primary reason was the cascading effect of the taxation system.

Q: When was GST implemented in India?

Ans:

GST was implemented in India on 1 July 2017 at midnight.

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