Document

What is the Difference Between GST and VAT

By Annapoorna

|

Updated on: Nov 7th, 2023

|

2 min read

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 from 1st July 2017. 

In this article, you can understand the differences between VAT and GST and their implications. GST has eliminated the cascading effect of taxes on the economy. 

Meaning of cascading effect of tax

Cascading effect is when there is a tax on tax levied on a product at every step of the sale. The tax is levied on a value that includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax”. Let us now understand what the Value Added Tax (VAT) is and how it impacted the Indian economy.   
 

Watch this video on cascading effects of erstwhile tax structure:  

 

What is VAT?

Value Added Tax (VAT) is an indirect value added tax which was introduced into Indian taxation system on 1st April 2005. A value-added tax (VAT) is a consumption tax levied on a commodity whenever it adds value at any point in the supply chain, from production to sale. The amount of VAT that the consumer pays is based on the cost of the product, minus any previously taxable costs of products used in the product.

As a taxation concept, VAT replaced Sales Tax. VAT was introduced to make India a single integrated market. However, it was introduced at state-level. On 2nd June 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.  

For interstate supplies, CST or Central Sales Tax was imposed. CST applies on the sale of goods levied by the Central Government. It is collected and retained by the state where the tax is collected. 

Disadvantages of VAT

  • Cascading effect of taxes
  • No Input Tax Credit (ITC) under VAT on service tax paid
  • Different VAT rates in different states in India
  • Different VAT laws in every Indian state
  • Input of Central Sales Tax (CST) could not be adjusted against VAT and vice versa

What does GST bring in that VAT could not?

Designed to be a single, comprehensive, destination-based taxation concept, Goods and Services Tax (GST) unifies the entire country in terms of how the tax is collected. GST has revolutionized the Indian taxation system. GST intends to further eliminate the concept of “tax on tax”.  

Benefits of GST Implementation

  • Removal of the cascading effect of tax
  • Simple online procedures for registration, return filing, and refunds
  • Fewer compliances
  • Defined treatment for e-commerce companies
  • Simpler procedures and return forms for small taxpayers
  • Improved logistical efficiency
  • A single indirect tax law across India
  • Uniform indirect tax rates across India

Let us look at an example  

Consider a consultant providing services to his clients. 

Under VAT regime: The consultant would have charged 15% service tax on services of Rs. 70,000. So, his output tax was Rs. 70,000 x 15% = Rs.10,500. Then, if he purchased office supplies for Rs. 25,000 paying 5% as VAT which would amount to Rs. 25,000 x 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. Now, subtract GST on office supplies (Rs. 25,000 x 5%) = Rs. 1,250. Therefore, the net GST liability to pay is Rs. 11,350  

Conclusion

By implementing GST on goods and services, the economy is improving through the elimination of the cascading system of tax and streamlining the business process in India.  

Learn everything about GST

How can Clear GST help businesses with GST compliances?

  • We maximise your tax savings so that you claim 100% Input tax credits, every time
  • We enable easy filings for all GST forms, from GSTR-1 to GSTR-9
  • You can easily connect across 100 ERPs and import data error-free
  • You get an AI-powered matching engine to reconcile 6000+ invoices per minute
  • You can enjoy bank-grade security with SSL, PCI and ISO certifications
  • You can ensure 100% accurate filing with multiple validations at each step, reviewed by 60+ experts
  • You get access to 25+ smart reports on tap

inline CTA
India’s Fastest and Most Advanced 2B Matching
Maximise ITC claims, use smart validations to correct your data and complete 2B matching in <1 minute
About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

rhs_card

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption