GST V/S VAT - Understand the difference between VAT and GST

What is GST ?

Goods and services tax is a tax on the supply of goods and services, or both. The few exceptions being

  • Supply of alcoholic liquor for human consumption.
  • Petroleum
  • Tobacco

GST is destination based consumption tax i.e. tax would accrue to the state in which goods or services are finally consumed. GST having a dual tax structure both centre and state will have the power to levy tax on local supply of goods and services. GST is an integrated tax and has subsumed various indirect taxes in itself like VAT, Service Tax,etc.

What is VAT?

Value Added Tax (VAT) is an indirect value-added tax that was introduced into the Indian taxation system on April 1, 2005. As a taxation concept, VAT replaced Sales Tax. VAT was introduced in India to make it a single integrated market. On June 2, 2014, VAT was implemented in India's states and union territories, except the Andaman and Nicobar Islands and Lakshadweep Islands.

Why GST was introduced?

Due to the various problems regarding our old taxation system, like double taxation, higher burden on the consumers, and various procedural requirements at the various levels, the government of India has decided to abolish all multiple tax requirements and has introduced a single taxation system for all the indirect taxes known as Good and Service Tax.

What were the problems regarding VAT?

The various ills of VAT taxation system which paved a way for the introduction of GST - one nation one tax are:

  • Cascading effect of taxes
  • No ITC on services rendered
  • Different VAT laws in every state
  • Inter state tax credit was not possible to be claimed

What were the challenges before the GST

  • Legacy issues which will use resources.
  • Non Harmonization of Tax rates.
  • Lack of Procedural Manuals.
  • Double Registration- Handling old Registration.
  • Poor Quality of tax Returns.
  • No existing system for 100% scrutiny of Tax Returns and Audit.
  • Lack of Cross Verifications with other tax administrations.
  • Lack of mechanism to control Evasion.

Understand the Difference Between GST and VAT

GST has been designed as a comprehensive, destination-based taxation concept. It aims to streamline the tax levy, collection, and monitoring process and overcome taxation's cascading effect. There may also be revenue gain for the Centre and states due to the widening of the tax base, increase in trade volumes, and improved tax compliance.

S No Particulars Old VAT/ Indirect Tax System New GST Model
1 Nature of Tax Based on Origin or value addition Destination-based tax on final consumption
2 Central Taxes Subsumed Central Excise Additional Duty of Customs Service Tax CGST
3 State Taxes Subsumed VAT Purchase Tax Entertainment TAx Luxury Tax Lottery Taxes State Cess and Surcharge Entry Tax SGST
4 Custom Duties Replaced Basic custom duty Additional Duty of Customs Special Additional Duty of Customs Cess BCD IGST
5 Inter State Taxes Replaced Excise Duty Central Sales Tax Service Tax IGST
6 Intra State Taxes Replaced Excise Duty State VAT Service Tax CGST SGST
7 Taxation event Tax is levied on manufacture, sale/completion of provision of services Supply of Goods and Services

A brief comparison between GST and VAT

S No Particulars Old VAT/ Indirect Tax System New GST Model
1 Taxation Point Sale of Goods Supply of Goods and Services
2 Applicability On goods only Both Goods and Services
3 Registration Threshold Compulsory if turnover exceeds Rs 10 lakhs Compulsory of turnover exceeds Rs 40 lakhs
4 Collection of revenue By selling state GST is a destination or consumption based tax hence ultimate buying state
5 Interstate tax credit Not available (CENVAT applicable) Can be taken
6 Compliances required Multiple compliances and registrations Compliance procedure has been streamlined
7 Cascading effect VAT was levied on value addition at each stage, hence resulting in double taxation in some cases. The ill of Tax on Tax has been eradicated with the introduction of GST
8 Online Payment Online tax payment was not mandatory It is necessary to make online payment of GST

How tax is calculated under GST and VAT?

Under GST (Goods and Services Tax):

GST Calculation:

  • Output Tax: Tax collected on sales (output supplies).
  • Input Tax: Tax paid on purchases (input supplies).

Tax Calculation Method:

  • Tax on Output: Calculate tax on the selling price at applicable GST rates.
  • Tax on Input: Deduct input tax credit (ITC) from the output tax payable.

GST Calculation Formula:

  • GST Payable = Output GST - Input GST

Under VAT (Value Added Tax):

VAT Calculation:

  • Tax is levied at each stage of production and distribution.
  • Tax is calculated on the value added at each stage of the supply chain.

Tax Calculation Method:

  • Output VAT: Calculated on the value added to the product at each stage of sale.
  • Input VAT: Tax paid on purchases can be used to offset the output VAT.

VAT Calculation Formula:

  • VAT Payable = Output VAT - Input VAT

Let us understand how calculations under both the systems of GST and VAT are done

Example of Calculation
Particulars Tax Applicable Tax Rate Taxable Value Tax Calculated Total Amount
Tax Implications under VAT
Price of manufactured goods Excise Duty 12.5% 10,000 1,250 11,250
Sale of goods VAT 14.5% 11,250 1,631 12,881
Total Amount Payable 2,881 12,881
Tax Implications under GST
Consumption of goods CGST 9% 10,000 900 10,900
Consumption of goods SGST 9% 10,000 900 10,900
Total Amount Payable 1,800 11,800

Frequently Asked Questions (FAQs)

Q- Is VAT replaced by GST in India?

Introduction of GST has subsumed major indirect taxes including VAT. But, VAT on some products like electricity and alcohol for human consumption and on petroleum products is still prevalent. These products have not yet been covered under the scope of GST.

Q- Which is a better taxation model for India VAT or GST?

GST was introduced in India to overcome the inherent limitations or drawbacks of the vTA taxation system. Prior to implementation of GST multiple indirect taxes were inforce for goods and services GST has came on the concept of one nation one tax. One of the major issues redressed by GST being the removal of tax on tax a.k.a cascading effect of taxation.

Q- Is GST a Value Added Tax?

GST or Goods and Services Tax is a comprehensive tax levied on value addition to supply and its point of taxation being final consumption or destination.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.