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The introduction of GST or Goods and Services Tax has indicated a significant overhaul of the indirect taxation system in India. The key objectives of GST implementation have been the introduction of a single tax rate (for each product/service) across the country and an increase in the quantum of indirect taxes collected. The relatively new GST has replaced a number of existing state level taxes but one tax that is still applicable to some key products/services is VAT or value added tax. In the following sections we will discuss the difference between GST and VAT.
The Basics of Value Added Tax
The full form of VAT is Value Added Tax. It is a state level tax that is applicable to some key products such as petrol, diesel and alcohol for human consumption that are not taxable under the GST Act. VAT was, in fact, introduced in 2005 as a replacement for the earlier Sales Tax so that a unified tax rate for products and services was possible across India. However the VAT regime did have a few drawbacks. The key reasons for implementation of GST as a replacement for VAT included:
- Being a state subject, the applicable rate of VAT for the same product/service tended to vary from state to state.
- Difference in VAT rules and regulations from one state to another increased the compliance burden for businesses.
- Cascading effect of taxes i.e. the end user has to bear the cost of a single good/service that has been taxed multiple times which increased the price for the end user.
- Businesses paying customs duty on their raw materials/inputs did not have the option of offsetting such costs through Input Tax Credit (ITC) or similar mechanism.
The Basics of Goods and Services Tax
The full form of GST is Goods and Services Tax. This tax was designed to eliminate the key issues that had been identified subsequent to implementation of the VAT regime. In that respect, some key features of GST are:
- Introduction of a single tax rate for a specific good/service across India
- Reducing compliance burden through introduction of a single unified set of GST rules
- Eliminating cascading effect of taxation such that GST is applicable only once on a product/service
- Introduction of input tax credit (ITC) mechanism to help businesses offset GST costs on various inputs/raw materials
These unique features form the basis of the difference between GST and VAT.
Difference between GST and VAT in India
The following are the key differences between GST and VAT:
| Goods and Services Tax | Value Added Tax |
| Applicable to both goods and services | Applicable only to goods (Service Tax for services) |
| Applicable on supply of goods/services | Applicable at the time of sale of goods |
| The tax collected is equally shared by state/central government | The tax collected is held solely by the state in which the sale occurs |
| Returns are to be filed every month (20th of the next month for the preceding month). Know about Offline GST Filing Tools | Returns filing dates are 10th, 15th and 20th of the succeeding month for the preceding month |
| Registration exempt for providers of services up to Rs. 20 lakh annual turnover/exemption in case of goods suppliers is up to an annual turnover of Rs. 40 lakhs | Mandatory registration in case annual turnover exceeds Rs. 5 lakhs |
| Both online and offline payment options available. (Online payment mandatory if GST payable exceeds Rs. 10,000) | Only offline payment option available |
| Input tax credit benefit is available | No input tax credit benefit available on customs duty paid |
| GST is collected by the consumer state | VAT is collected by the seller state |
| GST payable = GST on supply of goods/services – input tax credit | VAT Payable = VAT on output – VAT on input |
Conclusion
In view of the key difference between GST and VAT, it is obvious that in many ways GST is an improvement over the VAT regime. However currently there are a few products such as petrol, diesel and alcohol for human consumption that are not included in GST. As GST evolves further, we can expect additional goods and services to be included under GST. What’s more the rationalization of rates under GST is expected to continue in the near future which will help improve indirect tax collection across India.