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GST and VAT Know The Difference

GST and VAT, both being consumption-based taxes, share similarities but also have distinct differences. It replaces multiple indirect taxes and streamline the tax system and reduce cascading effects. Checkout the diffrences,scope and uses of GST and VAT here
authorImageShruti Dutta10 May, 2024
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GST and VAT Know The Difference

GST and VAT: Taxation is a fundamental aspect of any economy, serving as a vital source of revenue for governments while also influencing consumer behaviour and economic growth. Two prominent systems often discussed in indirect taxation are Goods and Services Tax (GST) and Value Added Tax (VAT). While GST and VAT are consumption-based taxes levied on goods and services, they have distinct characteristics that set them apart. This article delves into the disparities between GST and VAT, exploring their definitions, mechanisms, implications, and applications in different economic contexts. By gaining clarity on these fundamental differences, readers can develop a deeper understanding of indirect taxation and its impact on businesses, consumers, and the overall economy.

What is GST?

GST, Goods and Services Tax, is an indirect tax applicable to the supply of goods and services. It operates on a multi-stage, destination-oriented basis, applying to each value addition in the supply chain. GST replaces indirect taxes such as VAT, excise duty, and service taxes, streamlining the taxation process. This tax system has goods and services under a unified domestic indirect taxation law throughout India. GST is charged at every point of sale. The Goods and Services Tax Act was enacted by the Indian Parliament on March 29, 2017, and became effective from July 1, 2017.

What is VAT?

Value-added tax (VAT) is a consumption tax imposed on goods and services at each stage of the supply chain where value is added, starting from production to the final sale. The VAT the consumer pays is calculated based on the product's cost minus any previously taxed materials used in its production. VAT is categorised as an indirect tax because the actual tax burden may be passed on to consumers indirectly, even though businesses pay it to the tax authorities. While VAT is not universally implemented across all countries or regions, it is often exempt for exported goods. Typically, VAT operates as a destination-based tax, meaning the consumer's location determines the tax rate and applies to the selling price. VAT, GST (Goods and Services Tax), and general consumption tax (GCT) are often used interchangeably to refer to similar tax systems.

What is VAT and Why is it Being Merged into GST?

In 2005, Value Added Tax (VAT) replaced the previous 'Sales Tax' system. It is an indirect tax imposed at each stage of the supply chain and applies to certain essential products like petrol, diesel, and alcohol for human consumption, which are not taxable under the GST Act. VAT aimed to transform India into a unified market, striving for a standardised tax rate across products and services. However, the transition to this taxation system faced challenges, as several indirect taxes, including VAT, were abolished and integrated into the GST framework.
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Difference between GST and VAT

Goods and Services Tax (GST) and Value Added Tax (VAT) are indirect taxes levied on consuming goods and services, but they differ in several aspects. While both aim to streamline the taxation system and generate revenue for the government, there are key distinctions in their scope, applicability, administration, and impact on businesses and consumers.
Difference between GST and VAT
Parameter GST VAT
Where is it taxed? On both goods and services On the sale of goods (service tax for services)
When is it applicable? On supply of goods and services At the time of sale of goods
Tax rate and laws Tax rates are uniform across India It has different rates and laws in each state
Authority over taxes The collected tax is equally shared by the state/central government The collected tax is confined to the state in which the sale takes place
When is the return filed? Returns need to be filed every 20th of the next month for the preceding month The dates for filing returns are the 10th, 15th, and 20th of the next month for the preceding month
Mode of payment Both online and offline payment options are available (Online payment is mandatory if the GST payable is more than Rs. 10,000) The only offline payment option is available
Input tax credit Input tax credit benefit is available, i.e. a taxpayer can claim the credit on the supplies (Goods and Services) received No input tax credit benefit is available on customs duty paid
Compliances (Movement of goods) A similar set of compliances for the movement of goods between states Compliances for the movement of goods between states differ from one state to another
Who collects the tax? Consumer state The seller’s state

How GST and VAT are Calculated?

While some economists argue that VAT (Value Added Tax) and GST (Goods and Services Tax) are essentially two names for the same tax, a closer examination reveals distinct differences. This example illustrates the contrast in calculation methods between GST and VAT, shedding light on their respective implications, such as the impact on the final cost of goods and services.
  1. VAT System :
Under the VAT system, consider a consultant charging a 15% professional tax on services amounting to Rs. 1,00,000. The output taxable liability, which is the tax on the value added by the consultant, for this service would be Rs. 15,000 (Rs. 1,00,000 x 12%). If the consultant purchases office supplies for Rs. 30,000, paying 5%, VAT will incur an additional Rs. 1,500 (Rs. 30,000 x 5%). Notably, the entire tax paid on supplies cannot be deducted under VAT from the output tax liability on services. Hence, the total amount payable would be Rs. 16,500 (Rs. 15,000 + Rs. 1,500). 2. GST Regime : Contrastingly, under the GST regime, let's assume the same consultant charges an 18% professional tax on services worth Rs. 1,00,000. The resulting output taxable liability would be Rs. 18,000 (Rs. 1,00,000 x 18%). If office supplies are purchased for Rs. 30,000, paying 5%, GST will incur Rs. 1,500 (Rs. 30,000 x 5%). However, unlike VAT, GST allows for the deduction of tax paid on supplies from the output tax liability on services. Consequently, the amount payable would be Rs. 16,500 (Rs. 18,000 – Rs. 1,500). Begin your journey towards academic excellence in Commerce with our comprehensive Class 11 Commerce courses . Master the CBSE syllabus with expert guidance and ace your exams. Enroll now!”
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Difference between Gross and Net Margin FAQs

What is the basic difference between GST and VAT?

GST (Goods and Services Tax) is a comprehensive tax system levied on the supply of goods and services at each stage of the supply chain, whereas VAT (Value Added Tax) is a consumption tax imposed on the value added to goods and services at each stage of production and distribution.

How do GST and VAT differ in terms of scope?

GST covers goods and services under a single tax law for the entire country, while VAT typically applies only to the sale of goods and may have different rates and regulations across states or regions.

What is the mechanism of taxation in GST and VAT?

In GST, tax is charged at each point of sale, with input tax credits available for taxes paid on inputs. In contrast, VAT is levied on the value added at each stage of production and distribution, with no provision for input tax credits in some cases
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