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  7. Major Difference Between VAT and GST

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

Updated on: 14 Oct, 2024 02:38 PM

Before the introduction of GST, commodities were subject to VAT or Value Added Tax. VAT was levied on the value added at each stage from manufacturing to sale. VAT was first introduced in April 2005. VAT used to vary from state to state and also led to the cascading effect, i.e., duplication of taxes. Later, VAT was replaced by GST or Goods and Services Tax, which is a countrywide uniform consumption-based tax levied on the supply of goods and services. While VAT was replaced by GST, there is a significant difference between both taxation systems. In this article, we will explore the difference between VAT and GST.

Contents

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. Due to GSTs dual tax structure, both the center and state has 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.

The main issues with VAT, i.e., the cascading effect, were removed with the introduction of GST. In addition to this, GST also removed the increased consumer burden and procedural requirements at different levels by introducing GST.

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

Benefits of GST Implementation

GST is a single, all-inclusive, destination-based tax. The benefits of the implementation of GST include the following -

  • Elimination of the cascading effect of taxes, i.e., there will be no tax on tax.
  • Easy registration, filing, and refund process, which is completely online.
  • Simpler forms and procedures for small taxpayers.
  • Lesser compliances
  • Specific guidelines for e-commerce businesses.
  • More efficient logistics
  • Uniform indirect tax rates in India.

VAT vs GST

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 Taxation Point Sale of Goods Supply of Goods and Services
2 Applicability On goods only Both Goods and Services
3 Tax rates and laws Tax laws and rates differ from state to state. Same tax rates and same tax laws throughout India.
4 Tax Authority Tax is confined to the state of sale Tax amount is equally shared by the Central and the State Government.
5 Registration Threshold Compulsory if turnover exceeds Rs 10 lakhs Compulsory of turnover exceeds Rs 40 lakhs
6 Collection of revenue By selling state GST is a destination or consumption based tax hence ultimate buying state or the consumer state.
7 Input tax credit Not available (CENVAT applicable) ITC benefit Can be taken
8 Compliances required Multiple compliances and registrations Compliance procedure has been streamlined
9 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
10 Online Payment Online tax payment was not mandatory It is necessary to make online payment of GST
11 Timeline for Filing 10th, 15th, and 20th of the next month for the preceding month Every 20th of the next month for the preceding month.

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

The above table shows the calculation difference between VAT and GST. While both VAT and GST aim to levy tax on consumption, the major difference between GST and VAT is in its applicability, compliance frameworks and tax structures. VAT is levied on goods, and GST is levied on both goods and services.

Even though GST requires less compliance, it can still be complicated, especially for laymen. You can get expert help for GST-related services like GST registration and GST filing. Book a Tax Expert!

Frequently Asked Questions

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.

Q- What is the difference between VAT and GST?

VAT (Value Added Tax) is a state-level tax applied to the value added at each stage of production or distribution. In contrast, GST (Goods and Services Tax) is a national tax imposed on the supply of goods and services across the country. Similarly, VAT compliance requires filing returns and maintaining records according to state-specific rules. On the other hand, GST compliance is uniform across the country, with centralized registration, return filing, and input tax credit processes.

Q- Is VAT still applicable in India?

With the introduction of GST, major indirect taxes like VAT were largely replaced. However, VAT still applies to petroleum products, electricity, and alcoholic beverages for human consumption, as these items are currently excluded from GST.

Q- What is the calculation difference between VAT and GST?

Under GST, businesses can reduce their tax liability by claiming an input tax credit for the taxes paid on purchases, ensuring that only the value added is taxed. In contrast, VAT is calculated on the total product value at each stage, leading to cumulative taxes without any provisions for offsetting.

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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.in. 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.