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!
GST Registration
