What is the Difference Between GST and VAT?

In 2017, the Government of India decided to replace Value Added Tax (VAT) with Goods and Service Tax (GST). This major move aimed to reduce the limitations of VAT and achieve some specific economic goals. The main reason behind the introduction of GST was to eliminate the cascading effect of taxes, simplify tax regime, increase transparency in tax rates and remove multiple state-level taxes with a single unified tax across India. 

In this article, we have shed light on the difference between GST and VAT. So, if you want to know how GST vs VAT are different, then continue reading this post.

What is GST?

Introduced in 2017, the Goods and Services Tax (GST) is a unified, indirect tax. It is levied on the supply of goods and services across India. Since the implementation of GST, the complex web of central and state taxes has reduced. Other indirect taxes include VAT, excise duty, service tax, among others.

If a good/service costs Rs. 100 and the GST charged on it is 18%, the GST amount will be calculated as 100 x 18% = Rs. 18.

Importance of GST

The GST aims to simplify the tax regime, enhance transparency, and reduce administrative burden and costs. Before the implementation of GST, India was facing the cascading effect of the old tax system. This meant that taxes were levied at each stage of the production and distribution chain, which led to the following:

• Increase in the prices of products that the final consumers had to bear. So, by paying the multiple taxes the price of goods and services was inflating.
• The complex tax system was creating inefficiencies and increased compliance costs for businesses.
• The competition in the global market had reduced because of the heavy tax burden. 

Hence, the implementation of GST has been really important for the Indian economy.

What is VAT?

In the Indian taxation system, VAT was introduced on April 1st, 2005. The VAT is also known as Value Added Tax. It is an indirect tax, or consumption tax, levied on a commodity whenever it adds value at any point in the supply chain from production to sale. With two exceptions—the Andaman and Nicobar Islands and the Lakshadweep Islands—VAT went into effect in all of India’s states and union territories on June 2, 2014. However, VAT was abolished when GST was introduced in 2017.   

Value added tax is calculated during this formula: VAT = Output Tax – Input Tax. 

To understand the formula, let’s take an example, Mr. A is the owner of a restaurant. He bought raw materials worth Rs. 2 lakh and an input tax of 10% was imposed on raw material which is Rs. 20 thousand. 

After selling dishes made from raw materials, he earned Rs. 3 lakh. If we consider that the total output tax is 10% of the earnings, which is Rs. 30 thousand. So, the total VAT paid by Mr A is VAT= Rs. 30,000 – Rs. 20,000= Rs. 10,000.

Importance of VAT

The VAT has a special importance in the tax payment structure. Although this tax has been abolished in India, it still continues to be applied in many countries across the globe. Through the following points, the importance of VAT can be understood:

• Multi-stage Taxation: This tax is levied at each stage of the supply chain from raw materials to final customers. So, this means it is a cascade tax. The tax that the businesses pay is included in the cost of products or services they offer. So, its effect is borne by the final consumer.
• Input Tax Credit: The businesses can claim a credit for the VAT they have paid on their inputs against the VAT they have charged on their outputs. This means that the value added to the product or service at each stage is eligible for tax which helps in reducing the method of double taxation.
• Neutrality: The system of VAT is the same for different industries and product categories. However, the same tax rate applies to a wide range of goods and services but there are few exemptions.
• Transparency: This tax system is transparent as the tax burden is visible at each stage of the production and distribution chain. The customers have the benefit of this as it allows them to know how much tax they are paying. 
• Revenue Generation: The VAT is a source of revenue for governments around the world. Its multi-stage broad tax base provides a steady stream of income.
• Complexity: The VAT system is complex as the multi-stage nature of the tax can lead to record-keeping and compliance challenges for businesses.

Points of Key Differences Between GST and VAT

The following are the points of key differences between GST and VAT:

Conclusion

The comparison between GST and VAT can be done in multiple points as mentioned in this blog post. Compared to VAT, the GST is considered a better tax system. After the implementation of GST, the growth of the economy has seen a significant improvement. The new indirect tax has eliminated the cascading effect of taxes and made the business processes easier.