Here we are with a comprehensive guide of VAT vs GST, in this article all the doubts related to both of these are tried to resolve with appropriate examples. Learn the details about GST registration for non-resident taxpayers, submission of taxes, how they are administered, which one to be paid, both taxes are applicable or only one of them. All such queries are resolved in this article with definitions, facts, and with refined govt. data to verify the details; so, read the article to get all your answers related to VAT & GST. If you face any issues contact us toll-free: +1-844-405-0904
Most of the businesses or owner of the business is confused about whether VAT registration is necessary after the implementation of GST. As per the GST regime, no more VAT registration is required. Only GST registration is required for all taxpayers. So here we learn VAT vs GST to know these terms very clearly.
GST is an indirect tax that is levied on the transaction of goods and services to bring a unified market to the whole nation. While the VAT is a consumption tax that is levied on each step of the value addition of the product. In addition, there is a lot of difference between GST and VAT. So continue reading to know how GST is different from VAT.
Table of Contents
VAT(Value-added Tax)
The VAT is a state-level tax that was introduced on 1 April 2005. It is a type of tax that is levied on the sale of goods and services when the products are finally sold to the customer. This tax is applicable to some key products such as alcohol, petrol, and diesel for human consumption which is not taxable under the GST Act. There are many reasons to introduce GST some of them are as follows:
- Due to the state region, the VAT rate of the same product/service varied from one state to another state.
- Due to differences in VATs rules and regulations from one state to another state, the compliance burden for businesses increased.
- The cascading effect of taxes: The final user has to bear the cost of a single good/service, which is taxed multiple times thus increasing the price for the final user.
- Businesses paying customs duties on their raw materials/inputs did not have the option to offset such costs through input tax credit (ITC) or similar mechanisms.
GST(Goods and Service Tax)
All Indirect Taxes were replaced by the Goods and Service Tax, which was implemented as a new league in the indirect taxation system. GST is introduced on 1 July 2017 which mainly aims to reduce all the drawbacks of VAT. The government will implement the Integrated GST if the commodity transaction involves two states. If a product is supplied within the borders of a state, there will be two types of tax: central GST and state GST. Some of the key features of GST are as follow:
- Introducing a single tax system for Specific goods or services in the whole nation.
- Removal of Cascading tax effect so that GST is applied only on Goods or services.
- input tax credit (ITC) mechanism is recommended to increase business offset GST price on different raw materials/inputs.
- The introduction of a single unified set of GST rules to decrease compliance burden.
Difference Between VAT and GST With Example
Under GST Administration
| Difference | VAT | GST |
| Taxation rates and laws | Each state in India has a separate VAT rate and tax legislation that falls under it. | Each state in India has the same GST rate. There are four separate Acts that apply for various types of transactions when it comes to tax laws: the Central GST Act, State GST Act, Integrated GST Act, and Union Territory GST Act. |
| Payment mode | The mode of payment for VAT is only through the offline mode of payment. | GST is payable through both either online or offline mode. |
| Tax collection | The state where the seller resides is in charge of tax collection. | Tax collection falls under the purview of the consumer state. |
| Compliance | Each state has a unique compliance procedure for the transfer of commodities across states. | Different states share a similar compliance structure for the interstate transfer of products. |
| Input tax credit | On the materials they obtained, the taxpayer is eligible for an input tax credit. | Input Tax Credit benefits are not accessible. |
| Taxable Event | The VAT was applicable to the sale of goods. | GST(Goods and Services Tax) is applicable to every supply of goods and services. |
| Authority Over Taxes | A levy is collected by the respective state governments Here the state government has the right over the income of tax collected by such rent. | Under SGST and CGST goods and services, tax is collected for every sale in each state. The center and state zodiac are then bifurcated. |
| Return filing | 20th of the succeeding month | 10th, 15th and 20th of succeeding month |
| Registration | Mandatory if turnover exceeds Rs 5 lakh (differs from state to state) | Necessary if turnover exceeds Rs 20 lakh |
Consider a consultant providing service to his clients
GST on service of Rupees 90,000 @18%=16200
Subtract GST on office supplies (Rupees 35000*5%)= Rupees 1750
Net GST has to pay Rupees 14450
Now Consider a Computer manufacturer and Implementation of VAT and GST for him
Pre-GST Implementation Summary
Before the implementation of GST, If a computer manufacturer had to sell a computer, he had to pay excise duty and VAT on it. So if the cost of a computer sold was Rs 7,000 then the Excise duty @ 12.5% was Rs 875 which would bring the value to Rupees 7875. VAT of Rs 1142 i.e. @ 14.5% would be required on this value. So, the buyer has to pay Rupees 9017.
Now let’s see how the same manufacturer sells his computer under GST administration
Post-GST Implementation Summary
Under the GST administration, only GST will have to pay the price of the computer. So, the seller will have to pay CGST @ 9% and SGST @9% on the value of the equipment which is Rupees 7000. So, in this case, the buyer will have to pay Rupees 7000+Rupees 630(CGST)+Rupees 630(SGST) that is Rupees 8260 to buy the computer.
From the above example, we assume that the cascading effect of tax has disappeared and less amount has to pay under GST administration.
Under VAT Administration
The consultant levied a 15% service tax on services of Rs 90,000. Hence, his output tax was 90,000*15% = Rs. 13,500.
Then if he buys office supplies for Rupees 35000 paying 5% as VAT: Rupees 35000* 5%= Rupees 1750.
He had to pay a production service tax of Rupees 13,500 without deducting VAT of Rupees 1750 already paid on stationery. His total tax amount outflow is Rs 15,250.
In the End
Looking at the main differences between GST and VAT, it is clear that in many ways GST is an improvement in VAT administration. However, at present, some products such as petrol, diesel, and alcohol are for human consumption which is not included in the GST.
As GST moves forward, we can expect additional goods and services to be included under GST. What’s more, rationalization of rates under GST is expected to continue in the near future which will help improve indirect tax collections across India.