Know the key differences between GST and VAT

 

The introduction of GST (Goods and Services Tax) has overshadowed the indirect taxation system in India, such as VAT (value-added tax), excise duty, and service tax. The primary reason for this is the elimination of the cascading effect of taxes on the economy. VAT is a state-level tax charged on the sale of goods immediately upon preparation of the Sale Invoice or when the goods are moved for sale. 

Value Added Tax or VAT: Fundamentals 

The Value Added Tax (VAT) was, in fact, introduced in 2005 as a replacement for the earlier Sales Tax. The goal of VAT was to create a unified tax rate for products and services across India. However, the VAT regime did have a few drawbacks. The key reasons for the implementation of Goods and Services Tax (GST) as a replacement for VAT included:

- Being a state subject, the applicable rate of VAT for the same product/service tends to vary from state to state.

- Differences in VAT rules and regulations from one state to another increased the compliance burden for businesses.

- GST replaces all indirect taxes levied on goods and services by the central and state governments. This will eliminate the "cascading" or "tax on tax" effect of transactions under the current system.

- Businesses that paid customs duty on their raw materials/inputs did not have the option of offsetting such costs through an Input Tax Credit (ITC) or a similar mechanism.

Goods and Service Tax or GST: Fundamentals

This tax was designed to eliminate the key issues that had been identified after the 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 the introduction of a single unified set of GST rules

- Eliminating the cascading effect of taxation such that GST is applicable only once on a product/service

Who should file a GST return? 

• The pre-GST laws must be followed by individuals and enterprises that were previously registered.
• Businesses that have a yearly revenue of more than Rs. 40 lakhs are eligible for GST registration online. 
• Any person who sells things online using a marketplace aggregation
• E-commerce aggregators are also required to pay GST.
• New GST registration is also applicable to people who pay taxes through a reverse charge system. In such situations, the receiver is responsible for paying taxes rather than the provider of the goods and services

Key differences between GST and VAT

GST	VAT
Applicable on both goods and services	Applicable on the sale of goods
Tax rates are consistent across India	Tax rates and laws vary in each state
The state and central governments split the tax revenue evenly.	The collected tax is only applicable to the state where the sales are made.
Returns must be filed on the 20th of the month following the preceding month.	The dates for filing returns are the 10th, 15th, and 20th of the next of the preceding month
There are both online and offline payment methods available.	Limited to offline payment methods only
A taxpayer can claim an input tax credit for the supplies they have received.	There is no benefit for an input tax credit on paying custom duties
Tax is collected by the consumer state	Tax is collected by the seller’s state
GST payable = GST on supply of goods/services – input tax credit	VAT payable = VAT on output - VAT on input

It's obvious that GST is a big improvement over VAT in many ways. However, there are still a few products that aren't included in GST, like petrol, diesel, and alcohol. As GST evolves, we can expect more goods and services to be added. And the rates for GST are expected to be rationalized in the future, which will help improve indirect tax collection in India. Understanding the differences between GST and VAT is essential to running your business successfully. Both taxes are used to collect revenue on goods or services that you sell, but they have some important differences. We hope this blog post has helped clear up any confusion over the two taxes and that you are better prepared to handle them when they come up in your business.