The Difference Between GST and VAT in India

What is GST?

India introduced the Goods and Services Tax (GST) in 2017 as a unified indirect tax system to replace several state-level taxes by combining multiple taxes into one. This new taxation framework was intended to reduce the cascading impact of taxes, a major concern under the Value-Added Tax (VAT) regime.

VAT imposed taxes on goods at all stages of sale, so the final customer had to pay taxes on top of the previously paid taxes. As a result, the prices increased leading to challenges for companies to control their tax obligations.

GST replaced many indirect taxes, including State Value-Added Tax, Central Excise Duty, and Service Tax. The consistent implementation of the GST across states has made interstate trade smoother, strengthened the national market, and benefitted both companies and consumers.

There are 13 types of GST returns in India, including GSTR-1, GSTR-3B, GSTR-4, GSTR-5, GSTR-5A, GSTR-6, GSTR-7, GSTR-8, GSTR-9, GSTR-10, GSTR-11, CMP-08, and ITC-04. These GST returns track finances for various businesses and ensure they follow regulations.

What is VAT, and What is its Role in the GST System?

In 2005, India replaced its previous Sales Tax system with VAT, an indirect tax. It is levied on consumption and applied to the cost of goods and services at all stages in the manufacturing and distribution process. The indirect tax implied that the customer would eventually bear the tax as part of the purchase price, in addition to already taxed amounts.

VAT was subsumed in GST, but still applies to a few fundamental goods, such as petrol, diesel, and alcohol for human consumption. These items are essential to the economy and are exempt from GST but are still subject to VAT.

Difference between GST and VAT

GST and VAT differ considerably in their implementation, framework, and impact on companies and consumers. While VAT simplified taxes considerably, GST transformed the tax landscape by overcoming VAT’s limitations and offering a more comprehensive and unified tax structure.

The key differences between GST and VAT are:

After a comparison between GST and VAT, here’s how GST overcomes many primary limitations of VAT:

1. Input Tax Credit (ITC):

VAT’s ITC was limited by the state for most goods, leading to a cascading effect with taxes imposed at every stage of the supply chain. It hurt inter-state businesses with no ITC collection on interstate transactions.

GST introduced an improved ITC framework allowing businesses to claim credits for taxes paid across the whole supply chain, regardless of whether the transaction is intrastate or interstate.

2. Uniformity in tax rates:

State-by-state variations in VAT rates led to market fragmentation, where various states imposed different taxes on the same goods. GST standardized tax rates throughout the country and made pricing and compliance easier. It simplified interstate businesses and eliminated varying state tax rules. Online GST calculators have made it easier to accurately get the tax amount to be paid.

3. Simplified Procedures:

Verifying GST online is simple with centralised interface for tax filings, payments, and credits. You can complete your GST Registration on the official portal and get your GSTIN, enabling you to legally conduct business transactions and avail input tax credits. This eliminates administrative issues and expenses for different state-specific tax requirements, freeing businesses to focus on growth.

4. Streamlining Tax Disparities:

Variations in state tax policy sometimes resulted in tax disparities under VAT, inconveniencing businesses and the flow of commodities over state borders. GST tackles these disparities by introducing centralised rates, promoting fair competition, and aiming for a fairer national tax system

Conclusion

Considering the fundamental differences between GST and VAT, the application of GST on goods and services has proven to be more efficient in various ways. The transition from VAT to GST has made tax collection easier, promoted transparency, and encouraged economic efficiency. The economy has benefited from these transformations by encouraging growth and cutting expenses for companies operating across the country.

Frequently Asked Questions (FAQs):

1. Are the tax rates different under GST and VAT?

Yes, the tax rates for GST and VAT vary significantly. GST is a unified tax system implemented in India to replace several taxes, such as VAT, excise duty, and service tax. There are four major GST rates in 2024: 5%, 12%, 18%, and 28%, which apply to various services and goods. VAT rates differ by state, resulting in a more fragmented tax structure.

2. Is VAT necessary after GST?

Most goods and services are no longer subject to VAT after the implementation of GST. VAT and other indirect taxes have been replaced with a single and streamlined tax structure. However, VAT is still levied on certain items, such as petroleum products and liquor, which are exempt from GST but are charged under state VAT rules.

3. Which is better, GST or VAT?

The consolidated and streamlined taxing structure of the GST makes it better than VAT. It also lowers the tax burden by eliminating the cascading impact of taxes. It also eliminated the differing state-level taxation rates of VAT, thus making the taxation process effective and manageable.

4. Is VAT the same as GST?

Despite being indirect taxes, there is a difference between VAT and GST. While GST is a unified, national tax that applies to both goods and services, VAT is a state-level tax collected on the sale of goods. GST is divided by the central and state governments, whereas VAT is paid directly to the state government.

5. Do GST and VAT treat imports and exports differently?

Yes, imports and exports are treated differently under GST and VAT. While VAT is charged on domestic sales, IGST (Integrated Goods and Services Tax) and customs duty are applied to imports. Conversely, exports are exempt from GST which reduces the tax burden and simplifies procedures for exporters.

6. Are there specific sectors that benefited more from the transition from VAT to GST?

The transition from VAT to GST benefitted sectors with complex supply networks and multiple taxes. Here are some examples of how GST made a difference. The paper sector witnessed major benefits as a consequence of GST-enabled centralised supply chain models, resulting in significant transportation and distribution cost reductions. The real estate industry benefited from simpler tax treatment and the settlement of long-standing concerns with valuation and input tax credits.

7. Can small businesses benefit more from GST or VAT?

GST, with its unified and streamlined taxing structure with lowered compliance expenses, can help small businesses more than VAT. Searching GST numbers for taxation purposes is also simple since it is a single registration number valid across states.

8. What were the challenges faced during the transition from VAT to GST?

Businesses faced many challenges while switching from VAT to GST. Understanding new GST regulations, upgrading IT systems to reflect the changes, and managing cash flow implications caused by increased tax rates and ITC provisions were necessary steps to transition to the new tax regime. Service providers had to especially focus on GST’s place of supply rules, which had a significant influence on their tax liabilities and compliance.