Difference between GST and VAT

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GST and VAT

The discussion of the issue that is the comparison of GST and VAT is of the utmost importance in this paper involving the development and the consequences of the indirect taxation systems in India.

Date of Commencement:

VAT: On April 1, 2005, when the Government of India rolled out Value Added Tax.

GST: The era of Goods and Services Tax (GST) was ushered in on 1st July 2017 in India.

Taxation Rates and Laws:

VAT: The Indian states' VAT has different tax rates different from state(s) VAT tax policies. On the other hand, the varieties of tax provisions between various states are staggering.

GST: The GST is the single rate, which is applied across all the states of the country. The GST Act is derived from four different Acts namely Central GST Act, State GST Act, Union Territory GST Act, and Integrated GST Act, each applicable to individual modes of transaction.

Authority:

VAT: As VAT forms part of a state government revenue, the latter has total control over the revenue proceeds.

GST: Both of these GSTs, both the state and the central government, are brought to all the sales and split the amount into 2 parts - the central and state tax.

Mode of Payment:

VAT: VAT payable is usually paid via online channels.

GST: GST payments can be performed online as well as offline allowing the taxpayers to choose the mode of payment as well as the level of convenience.

Compliance:

VAT: Compliance systems of interstate goods flow differ from state to state, hence unreliability and intensity become the issues.

GST: Compliance systems for the interstate movement of goods are harmonized in different states thereby standardization is recommended to create an environment of uniformity and ease of compliance.

Tax Collection:

VAT: The obligation of tax collection on the other hand lies with the state where the seller is.

GST: There is a state responsibility to charge taxes, in the case of GST the consumer's state, therefore, taxes are being collected where the consumer is located.

Input Tax Credit:

VAT: The taxpayers can avail of the tax input credit on the supplies they acquire through ITC.

GST: Input Tax Credit does not cover GST, hence there may be variations in tax treatment and financial implications for businesses.

GST (Goods & Services Tax) & VAT (Value Added Tax) are considered to be two varieties of general taxes, however, they differ in some respects.

Characteristics of GST and VAT:

Taxation Approach:

GST: GST is a wider tax imposed on the goods and services that are availed at each level of the supply chain, namely, from production to consumption. One of the goals of the GST is to have a singular node and tax system which is the union of several indirect taxes in the system like excise duty, service tax, and the VAT.

Tax Structure:

GST: The Goods and Services Tax is a multi-tier tax with a varied tax rate for goods and services from different sectors. It aspires to levy different branches for products and services based on whether they are basic or non-essential products.

VAT: It depends on a particular state. There can be one or several VAT rates being applied to various groups of goods or services only. Contrary to this, in most cases, the number of GST rates is not quite similar to that of VAT rates.

Compliance and Administration:

GST: The GST process being more uniform also has its own compliance and administration procedures which are maintained by a single tax return filing system and common tax portal for all the states and territories.

VAT: VAT compliance and administration may be different in different states, therefore filing, tax assessments, and enforcement mechanisms will be subject to variations from state to state.

Goods and Services Tax (GST):

Description:

Goods and Services Tax (GST) is a tax charged for each step of the supply chain starting from manufacturing until consumption covering supplies of goods and services. It was first launched in India on July 1, 2017, to contribute to the simplification of the existing tax system, elimination of cascading effects, and fostering economic growth.

Key Features:

Multi-tier Tax Structure: GST is a tax network having a multi-tier structure consisting of varied tax rates for different types of items and services. The tax rates are classified into four Main slabs: GST rates in India are divided into four categories - 5%, 12%, 18%, and 28%.

Uniformity Across States: GST intends to achieve uniformity in the tax rates and regulations inside all states and union territories in India. The structure of the current tax regime, which is complex and varied, is replaced with a unified tax system that is standardized.

VAT: VAT is a type of indirect tax introduced which is charged at every stage of production and distribution on the value added to goods and services. It concentrates on levying the value addition at each level of the supply chain rather than taxing the final product.

Uniformity:

GST: GST has been implemented nationwide to bring about uniformity in tax rates and laws among the states and territories of India. It aims to get rid of the complicated taxation structures of the past by simplifying the new tax system.

VAT: VAT rates and regulations may differ from one state to another and hence, companies engaged in business in various states may face problems because of inconsistencies and complexity in compliance.

Tax Components:

GST: Under GST, classifications of taxes are CGST (Central GST), SGST (State GST), and IGST (Integrated GST) for interstate transactions. CGST and SGST are charged by central and state governments, and IGST is applied for the transactions across states.

VAT: VAT is often rooted at the state level and VAT collections made by the state government remain with the relevant state government.

Similarities between GST and VAT: 

Tax Base:

Likewise, both GST and VAT are based on the general notion of taxing the value added at every stage of production and distribution. Through such a scheme, companies can claim tax credits on inputs taxes paid.

Consumer Burden:

Finally, GST and VAT both, through the value chain, pass on the tax cost to the final customer of goods and services. The different levels of taxes collected at different stages of the supply chain are combined and charged to consumers through sales of products and services.

Differences between GST and VAT:

GST: GST has a wider coverage, which extends to both goods and services, which is the focal point of the levy. The institution aims at proposing a tax system that is more detailed and comprehensive.

VAT: The VAT is paid upon the goods mainly which may not extend to the taxation of services like GST.

Tax Structure:

GST: GST has a multi-layered tax structure providing for different tax rates for different kinds of goods and services. The competent objective is to classify goods and services in various tax braces based on their nature and essentiality.

VAT: VAT can have one or more rates, which can occur in different states and with taxes applied to goods or services. But the distinguishing mark between GST and VAT is that the variation of VAT rate is less than the security guard of GST.

Compliance and Administration:

GST: Complying with and administering GST is now smooth and uniform, with one tax return filing system and an online portal of tax for all States and territories.

VAT: Different states would have different rules and procedures on VAT compliance and administration, such as the way that forms are filed, tax calculations, and enforcement systems.

Value Added Tax (VAT):

Description:

Value Added Tax (VAT) is an indirect tax assessed on the value added to goods and services throughout the manufacturing and distribution process implemented in India on April 1, 2005, replacing the sale tax property. VAT is designed to levy the extra value created at each point of the supply chain by taxing goods and services.

Key Features:

Tax on Value Addition: VAT is calculated on the value added to goods and services at each phase of production or distribution. It imposes a tax on the incremental value added as the product is manufactured through the supply chain.

State-specific Tax Rates: VAT rates and regulations may differ among States in the Indian subcontinent. There is a right of each state to establish its VAT rates while developing VAT legislation is also available and, this often results in a difference in rates and compliance requirements.

Credit Mechanism: VAT also facilitates a crediting process that is similar to that of GST, and in this way, businesses claim credit for the taxes paid on inputs used in the production or supply of goods and services. This is how it will prevent the systematic effects and also lower the tax levied.

State Administration: Primarily the VAT is administered by the state governments of India. Every one of the states has a VAT office that deals with tax collection, enforcement, and assessment within its area of jurisdiction.

Compliance Challenges: Completing the procedures and meeting the requirements may differ across the states under VAT, thus causing inconsistencies and complications in the administration of taxes. Businesses working with more than one state may encounter difficulties in compliance with the distinct VAT regulations.