GST is a value-added tax levied at each stage of production, distribution and consumption. It is commonly contrasted with Value Added Tax (VAT), which is an indirect tax levied on the incremental value added by each stage of production or distribution.
This article aims to explain the major differences between GST & VAT. Read on.
When goods and services add value to the supply chain, they are subject to indirect taxation known as value-added tax (VAT). VAT is a consumption-based tax. Before a commodity can be sold to a consumer, it must pass through several production and distribution stages.
Every time a commodity receives a value addition, the VAT is applied to the resulting product or service. The buyer of the goods or services pays the tax on the end product.
In India, a value-added tax known as the Goods and Services Tax (GST) was implemented in July 2017. Similar to the VAT, it is assessed on each value addition made to a good or service over the course of manufacturing and distribution. The GST system imposes a tax on products and services at each point of sale.
Consumers pay the GST, but businesses that provide products and services pay it to the government.
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VAT |
GST |
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VAT rates vary by state in India, as well as by goods and services in different categories. |
The GST rate is the same throughout India. |
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The state government collects the VAT and it is the regulatory authority that administers the VAT in each state in India. |
In the case of GST, each sale is subject to both the state GST and the central GST. |
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The collected tax stays within the state itself |
The tax is subsequently shared between the central and state governments in question. |
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Cooperation varies by state when it comes to the movement of goods. |
When it comes to GST, the movement of commodities has no effect because it is uniform across the country. |
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Tax collection is the duty of the seller's state. |
The state that consumes goods and services is responsible for tax collection. |
VAT allows states to enjoy certain benefits, such as the following -
VAT, as a tax based on consumption rather than another variable, provides a solid revenue source as a constant tax.
It can make exports and imports easier because a uniform tax percentage applies to a larger population.
VAT systems have the potential to generate significant amounts of money.
VAT systems keep a physical record of where each product comes from.
The drawbacks of VAT are -
The VAT system unfairly affects consumers based on their income. Instead of paying taxes depending on their yearly income, every customer pays a set tax on each product they purchase, irrespective of their income.
VAT raises company costs.
Local governments are unable to levy taxes at the local level.
The newly established GST has several advantages, of which some are mentioned below -
GST has simplified the movement of products and services among states, decreased business overheads, and enhanced overall logistics and operations.
In addition to eliminating various forms of taxes from Indian tax structures, GST also aims to simplify tax administration.
GST is a transparent tax system that gives an accurate and complete picture of taxes paid and collected, hence minimizing corruption within the tax administration and allied institutions.
GST has the following drawbacks -
It has increased the tax burden on small and medium-sized businesses.
Even though GST is marketed as a single taxation system, in reality, it is a dual tax because both the state and the center will collect separate taxes on a single sale or service transaction.
It has increased costs across all sectors, causing consumers to take most of the financial burden.
In India, the goods and services tax (GST) has replaced indirect taxes like value-added tax (VAT), which has resulted in consumers only having to pay taxes on the end product. This is an improvement over the previous regime because it simplifies the tax system and allows for seamless business operations across all sectors of the Indian economy.
Regardless of business turnover, any individual or entity that desires to supply goods or services can seek GST registration voluntarily.
Prior to the adoption of GST, several indirect taxes on goods and services were in place. GST is based on the idea of 'one nation, one tax.' One of the key difficulties addressed by GST is the elimination of tax on tax, sometimes known as the cascading impact of taxation.
GST, or Goods and Services Tax, is a comprehensive tax based on the addition of value to supply, with final consumption as the point of taxation.
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