The introduction of GST, short for Goods and Services Tax, has overshadowed the indirect taxation system such as VAT, excise duty and service tax in India. The primary reason behind this is the elimination of the cascading effect of taxes on the economy. VAT, short for value Added tax, is a state-level tax charged on the sale of goods immediately upon preparation of Sale Invoice or when the goods are moved for sale.
What is GST and its Cascading Effect?
Goods and Service Tax India is the new and much-advanced method of the taxation system and represents the unique ideology of ‘one nation, one tax’. This taxation system was introduced to eliminate the key issues that had been identified under the VAT regime such as the cascading effect tax on tax levied on a product at every step of the sale. The end consumer, in turn, had to pay the tax on the already paid tax.
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.
Benefits of GST implementation
- Cascading effect of tax no longer an impediment to the economy
- Simple online procedure
- Lesser compliances
- Separate treatment for e-commerce companies
What is VAT and Why is it Being Merged into GST?
Value Added Tax was introduced in 2005 as a replacement for the earlier ‘Sales Tax’ system. It is an indirect tax which is levied at every stage of the supply chain and is applicable to some key products such as petrol, diesel and alcohol for human consumption that is not taxable under the GST Act.
VAT was introduced to make India a single integrated market so that a unified tax rate for products and services as possible. However, the taxation system had a few drawbacks due to many indirect taxes including VAT being eliminated and merging with GST.
Drawbacks of VAT
- Cascading effect of the taxation system
- Input Tax Credit (ITC) cannot be claimed for services under VAT
- Different VAT rates are applicable in different states
- Also, different VAT laws for different states
Comparison between VAT and GST
Both the taxation systems have some major key differences.
|Where is it taxed?||On both goods and services||On the sale of goods (service tax for services)|
|When is it applicable?||On supply of goods and services||At the time of sale of goods|
|Tax rate and laws||Tax rates are uniform across India||It has different rates and laws in each state|
|Authority over taxes||The collected tax is equally shared by the state/central government||The collected tax is confined to the state in which the sale takes place|
|When is the return filed?||Returns need to be filed every 20th of the next month for the preceding month||The dates for filing returns are 10th, 15th and 20th of the next month for the preceding month|
|Mode of payment||Both online and offline payment options available (Online payment is mandatory if the GST payable is more than Rs. 10,000)||The only offline payment option is available|
|Input tax credit||Input tax credit benefit is available, i.e. a taxpayer can claim the credit on the supplies (Goods and Services) received||No input tax credit benefit is available on customs duty paid|
|Compliances (Movement of goods)||A similar set of compliances for the movement of goods between states||Compliances for the movement of goods between states differ from one state to another.|
|Who collects the tax?||consumer state||The seller’s state|
How Value Added Tax and GST are Calculated?
Though, as per eminent economists, VAT and GST are merely two names for one tax, but on scrutinizing minutely, one can observe the contrast. The following example on GST vs VAT calculation can explain the difference clearly.
(i) Under the VAT system
Suppose the consultant charged a 15% professional tax on services rendered worth Rs. 1,00,000.
Thus, the output taxable liability of the same will be Rs. 1,00,000 x 12% = Rs. 15,000 .
At that point, in the event that if the office supplies were bought for Rs. 30,000, paying 5% as Value Added Tax will amount to Rs. 1500 (Rs. 30,000 x 5%).
In this case, the whole amount, i.e. Rs. 16,500 (Rs. 15,000 + Rs. 1500 ) needs to be paid as the tax paid on supplies from the output tax liability on services rendered under the VAT system cannot be deducted.
(ii) Under GST Regime
Suppose the consultant charged 18% of professional tax on services rendered worth Rs. 1,00,000.
Thus, the output taxable liability of the same will be Rs. 1,00,000 x 18% = Rs. 18,000 .
If the office supplies were bought for Rs. 30,000, paying 5% as GST will amount to Rs. 1500 (30,000 x 5%).
In this case, the amount payable will be Rs. 16,500 (Rs. 18,000 – Rs. 1500 ) as unlike VAT, GST has the facility to deduct the tax paid on supplies from the output tax liability on services rendered.
In view of the key difference between GST and VAT, the implementation of GST on goods and services has proved to be more efficient in many ways. However, currently, there are still a few products such as petrol, diesel and alcohol that are not included in GST. With the further evolution of GST, we can expect additional goods and services to be included under the regime.