GST v/s VAT: Key Differences and Business Implications
India’s taxation system is known for catering to a wide range of taxes. Amidst the whole tapestry of taxes, two of the most significant taxes include GST, or Goods and Services Tax, and VAT, or Value Addition Tax. Both taxes have played a really crucial role in shaping the Indian economy, but people are often perplexed between the two taxes as well. This article discusses the GST v/s VAT differences and implications for businesses. File your GST returns now to avoid penalties and meet compliance.
What is VAT?
VAT is also known as value-added tax. It is an indirect tax that is imposed on the goods and services at each stage of production and distribution of goods. VAT is a tax that the consumer itself majorly pays. This is added to various stages during the large process of purchasing, manufacturing, and distributing the products by the business houses. For example- It can be comprehended through a detailed example if a manufacturer is buying raw products to manufacture bags. He is supposed to pay VAT on the purchase, and when the product is sold, the VAT is added to the selling price of the product. So, in this way, VAT is a tax that is often referred to as a ‘Consumption-based Tax’. It can also be problematic at times because often the final consumer bears the full VAT cost, as businesses pass on the VAT paid on their inputs through the VAT on their sales.
What is GST?
GST stands for Goods and Services Tax, which is a comprehensive indirect tax imposed on the supply of not only goods but also services. It came into action on 1st July 2017. It is designed to simplify the long list of taxes into one. GST has replaced multiple indirect taxes, which include Sales tax, Excise Duty, Services tax, and so on, creating one unified tax system of GST. It is paid by customers but collected and submitted to the governmental authorities by the businesses. GST is categorized into three parts, which are as follows: CGST, SGST, and IGST. GST has a broad tax base as it is applied to both goods and services, making it a more inclusive tax system.
GST v/s VAT
Now that a broader meaning of GST and VAT has been explained. It’s necessary to understand the key differences between them. Their major differences are as follows
VAT is a tax applied only on the sale of goods. It’s not involved with the services. On the other hand, GST, being a comprehensive tax, covers both goods and services.
Another key difference between the two is that GST is a destination-based tax. It is collected in the state where the goods or services are consumed, not where they are originally produced. However, the thing is not the same with VAT as it is generally an origin-based tax.
As we delve into the levels at which both these taxes operate. VAT is a state-level tax, and the rates and rules can differ between states. On the other hand, GST has a multi-level structure. CGST or Central GST, SGST or State GST, and IGST or Integrated GST.
In terms of the Credit System, GST has a significant component known as the Input Tax Credit System. Businesses can use this as an asset and reduce their liabilities. However, ITC on VAT is typically available on goods and not services.
Considering the rate structure of the two taxes can be inferred that GST has a uniform tax rate across the country. However, VAT rates can vary greatly across the states of the same country as well.
Business Implications of GST and VAT
The implementation of GST and VAT has several business implications.
With the coming of GST in the budget of 2017, multiple indirect taxes got unified into one, making it easier for both the producer as well as the consumer to comprehend the taxation system.
With respect to the impact on pricing. GST ensures that there are no cascading taxes (tax on tax) that have existed for a long time in systems like VAT. This reduction also leads to more authentic and transparent pricing.
However, as the business implications are seen with the coming of GST, compliance requirements have also increased over time. It requires more detailed and frequent reporting through filings of returns and so on.
Get Started with TaxDunia
Hence, GST is a better taxation system compared to VAT. It is quite an integrated, transparent, and uniform tax system, reducing the complexity of managing multiple taxes. Reach out to TaxDunia to file your returns and meet the compliance need. We offer personalised services to cater to the unique needs of clients.
