GST, or Goods and Services Tax, has cast a shadow over India’s indirect taxation system, which includes VAT, excise duty, and service tax. The fundamental reason for this is because taxes no longer have a cascading effect on the economy. VAT (Value Added Tax) is a state-level tax levied on the sale of goods either immediately after the sale invoice is prepared or when the products are moved for sale. there is a substantial amount of difference between GST and VAT

What is GST and How Does It Work?

The Goods and Service Tax (GST) embodies the distinctive idea of ‘one nation, one tax’ and is a new and much-advanced manner of taxing. This taxing method was created to address fundamental difficulties discovered under the VAT regime, such as the cascading effect tax on tax placed on a product at each phase of the transaction. The final customer, in turn, had to pay a tax on a tax that had already been paid.

Although GST has replaced a number of traditional state-level taxes, VAT, or value-added tax, remains in effect for some major items and services.

The advantages of implementing GST

  • Tax cascades are no longer a hindrance to the economy.
  • Easy to use online procedure
  • Lower compliance rates
  • Different treatment for e-commerce businesses

Why is VAT being merged into GST?

The Value Added Tax (VAT) was implemented in 2005 to replace the previous “Sales Tax” system. It is an indirect tax that is levied at every stage of the supply chain and is applicable to some major products that are not taxable under the GST Act, such as gasoline, diesel, and alcohol for human consumption.

VAT was adopted to help India become a more integrated economy with a single tax rate for goods and services. However, because many indirect taxes, such as VAT, were repealed and merged with GST, the taxation structure had several flaws.

VAT’s disadvantages

  • Input Tax Credit (ITC) cannot be claimed for services under VAT because of the taxation system’s cascading effect
  • In different states, different VAT rates apply.
  • Also, different states have varied VAT legislation.      

Difference between GST and VAT

ParametersGSTVAT
Where is it to be taxed?Both on products and on servicesOn the sale of goods (service tax for services)
When is it applicable?    On the supply of products and servicesWhen the things are sold,
Laws and tax ratesIn India, all tax rates are the same.Each state has various rates and laws.
Taxation authorityThe state and Central governments split the tax revenue evenly.The tax is only collected in the state where the sale takes place.
When does the return have to be filed?      Returns for the previous month must be filed on the 20th of the following month.  The 10th, 15th, and 20th of the next month are the deadlines for filing returns for the previous month.
Payment method      Payments can be made both online and offline (Online payment is mandatory if the GST payable is more than Rs. 10,000)  There is just one offline payment method.
Input tax credit      The benefit of an input tax credit is available, which means a taxpayer can claim a credit for supply (goods and services) received.  On customs duty paid, no input tax credit is available.
Compliances (Movement of goods)      The movement of goods between states is governed by a similar set of rules.  The regulations governing the transfer of products between states vary from one state to the next.
Who is in charge of collecting the tax?        consumer stateThe seller’s state

Also Read,

GST Requirement for MF Agent

How Value Added Tax and GST are Calculated?

Though according to famous economists, VAT and GST are simply two names for the same tax, a closer examination reveals a distinction. The distinction between GST and VAT can be simply explained using the following example.

Let’s Assume the consultant charged a 15% professional tax on services valued Rs. 1,000,000 under the VAT regime.

As a result, the output taxable liability will be Rs. 1,00,000 x 12 percent = Rs. 15,000

If office supplies were purchased for Rs. 30,000, paying 5% as Value Added Tax would equate to Rs. 1500. (Rs. 30,000 x 5 percent ). Because the tax paid on supplies from the output tax liability on services delivered under the VAT system cannot be subtracted, the entire sum, i.e. Rs. 16,500 (Rs. 15,000 + Rs. 1500), must be paid.

(ii) Under the GST regime, suppose the consultant charged 18% professional tax on services worth Rs. 1,000,000 provided.

As a result, the output taxable liability will be Rs. 1,00,000 x 18% = Rs. 18,000.

If you spend Rs. 30,000 on office supplies, you’ll have to pay Rs. 1500 in GST (30,000 x 5 percent ). In this situation, the amount due will be Rs. 16,500 (Rs. 18,000 – Rs. 1500), as GST allows you to deduct the tax paid on supply from the output tax duty on services supplied, unlike VAT.

Conclusion

The adoption of GST on goods and services has proven to be more efficient in many respects due to the primary distinction between GST and VAT. However, a few products, such as gasoline, diesel, and alcohol, are now exempt from the GST. We can expect more items and services to be included under the GST regime as the system evolves.

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