Value Added Tax (VAT)
Value Added Tax is an indirect form of taxation levied on goods and services when they add value to the supply chain. The Indian Government had introduced this taxation system on the First of April in the year 2005. Every commodity passes through various stages of production and distribution till it finally reaches the consumer. And a value addition is made to that commodity at each stage of production. So the VAT is added to that commodity for each of those stages. It is a consumption-based tax that is ultimately borne by the consumer of that product or service. Unlike the Goods and Service Tax (GST), the VAT is not uniform throughout the country, and it varies on a state to state basis. Each state also had different legislations on this tax which the businesses must adhere to at all costs.
Goods and Service Tax (GST)
Goods and Service Tax (GST) is an indirect taxation system that has managed to replace most of the indirect taxes in India. The Government of India had introduced GST on the 1st of July in the year 2017. Like VAT, it gets levied on every value addition made to a product or service in its production and distribution process. Under the GST system, the tax on goods and services gets levied at every point of sale. If the transaction of a commodity is between two states, the government will impose the Integrated GST. If the supply of a product is within a state, then the tax will have two components – Central GST and State GST. If a Union territory is also involved in a transaction, the Union Territory GST will be applicable.
Differences between GST and VAT
Some of the significant differences between GST and VAT are as follows:
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VAT |
GST |
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Date of Commencement |
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The Government of India had introduced VAT on 1st April 2005. |
The Government of India had introduced GST on 1st July 2017. |
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Taxation Rates and Laws |
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The VAT rate and the taxation laws under it are different for each state in India. |
The GST rate is uniform for each state in India. When it comes to taxation laws, there are four different Acts – Central GST Act, State GST Act, Integrated GST Act and Union Territory GST Act – applicable for different types of transactions. |
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Authority |
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Since the state government collects the VAT, they have total authority over the tax proceeds. |
The Central GST and State GST gets collected from every sale, and the tax amount then gets bifurcated between the two governments. |
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Mode of Payment |
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VAT is payable only through offline mode. |
GST is payable both through the online and offline mode. |
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Compliance |
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The compliance system for the movement of goods between states is different from one state to another. |
The compliance system for the movement of goods between states is similar across different states. |
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Tax Collection |
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The responsibility for the collection of tax lies with the seller’s state. |
The responsibility for the collection of tax lies with the consumer state. |
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Input Tax Credit |
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The taxpayer can claim the benefit of Input Tax Credit on the supplies received by them. |
The benefit of Input Tax Credit is not available. |
Conclusion
There are considerable differences between GST and VAT, but both of them are extremely important for the functioning of the Indian economy. The argument of GST vs VAT ignores the point that the government used the revenue generated from these taxes in the developmental activities of the country.
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