The Goods and Services Tax (GST), which has replaced the Central and State indirect taxes such as VAT, excise duty, and service tax, was implemented on July 1, 2017.
In this article, let us understand the differences between VAT and GST and their implications.
GST has eliminated the cascading effect of taxes on the economy. Let us get a deeper understanding of cascading effect of taxation.
What is cascading effect of tax?
Cascading effect is when there is tax on tax levied on a product at every step of the sale. The tax is levied on a value which includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax.”
Watch this video on cascading effects of our current structure:
Let us now understand what Value Added Tax (VAT) is and how it impacted the Indian economy.
What is VAT?
Value Added Tax (VAT) is an indirect value added tax which was introduced into Indian taxation system on April 1, 2005. As a taxation concept, VAT replaced Sales Tax.
VAT was introduced to make India a single integrated market. On June 2, 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.
Here are a few disadvantages of VAT :
- Cascading effect of taxes
- It was not possible to claim Input Tax Credit (ITC) on service under VAT
- Different VAT rates in different states
- Different VAT laws in every states
What does GST bring in that VAT could not?
Designed to be a single, comprehensive, destination-based taxation concept that will unify the entire country in terms of how the tax is collected, GST has revolutionized the Indian taxation system.
The Goods and Services Tax (GST) intends to further eliminate the concept of “tax on tax”.
Benefits of implementation of GST:
- Removal of cascading effect of tax
- Simple online procedure
- Lesser compliances
- Defined treatment for e-commerce companies
Let us look at an example:
Consider a consultant providing services to his clients.
Under VAT regime:
The consultant charged 15% service tax on services of Rs 70,000. So, his output tax was Rs 70,000 * 15% = Rs 10,500.
Then, if he purchased office supplies for Rs. 25,000 paying 5% as VAT : Rs 25,000 *5% = Rs 1,250.
He had to pay Rs 10,500 output service tax without getting any deduction of Rs 1,250 VAT already paid on stationery.
His total tax outflow is Rs 11,750.
Under GST :
GST on service of Rs 70,000 @18% = Rs 12,600
Subtract GST on office supplies (Rs 25,000*5%) = Rs 1,250
Net GST to pay = Rs 11,350
By implementing GST on goods and services, the Indian government is looking at improving the economy by eliminating the cascading system of tax and streamlining the business process in India.
As a dealer, you must be prepared for the change, which is why we have introduced ClearTax GST Software that will help get your business GST ready.
Our All-In-One GST Kit is specially designed for CAs.
You can also watch our GST tutorial videos to learn more.