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How to choose between Service Tax or VAT

Updated on: Oct 12th, 2021


5 min read

Guide to choosing the relevant tax applicable to your business The Indian Economy today is witnessing a huge wave of entrepreneurs who are coming up with innovative ideas and transforming these ideas into commercial use cases. In recent times, these new-age startups have revolutionized the way we shop, travel, book hotels, carry out businesses and more.

While taking the startup to new heights is what entrepreneurs focus on, the taxation and compliance part of running a business gets complicated. One of the most common issues that startups face is regarding the registration for service tax and/or value added tax (VAT). To understand if you need to register your startup for service tax or VAT, the first question that needs to be answered is–What do you sell?

Does your business sell physical goods or a service?

In a typical business scenario, this will be a straightforward answer. Service means any activity carried out by a person or a company for another entity in return of compensation. Goods, in general, means any physical product. The reason why this classification is necessary is because if you are proposing to deal in physical goods, you will attract the state VAT laws. But if you are a service provider, you will be required to comply with the center’s Service Tax provisions. In case of further complexity on identification as a service provider or goods seller, you can seek the advice of a ClearTax Expert.

Where to register for service tax or VAT?

In case of service tax registration, the Service Tax Department has to be approached. Click here to get your service tax registration done within 10 days. For VAT registration, your business needs to obtain a TIN number.

When is it mandatory to register?

There are certain benchmarks that a business needs to reach before they’re mandated to register for either service tax or VAT. The government has laid out certain exemptions for small and medium businesses and tax compliance registrations are not required to be done till the business’s turnover reaches the specified limits.

Tax typeTurnover limit for registration
Service taxRs 9 lakh
VATRs 10 lakh

Service tax registration has to be done by a business when the turnover exceeds Rs 9 lakh in a financial year. However, service tax is required to be paid only when the turnover goes beyond Rs 10 lakh.

How are the service tax or VAT returns to be filed?

After you’ve registered for the tax that is applicable to you, once your business crosses the threshold limits, the tax that has been collected has to be deposited with the government and returns for the same have to be filed. In case of service tax, the entity liable to file returns has to do so bi-annually. The returns have to be filed within 25 days of the end of the half year.

Click on the following link to get expert assistance on filing service tax returns. For VAT, different states have specified the dates for filing of VAT returns. Get our experts to help you file VAT returns. As an entrepreneur you may find yourself short on time to look into all of these compliances, which is why it is best to outsource these tasks to a ClearTax expert and get your compliance done on time.

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Quick Summary

Startups should understand whether they need to register for service tax or VAT based on whether they sell physical goods or provide services. The thresholds for mandatory registration are Rs 9 lakh for service tax and Rs 10 lakh for VAT. Returns need to be filed bi-annually for service tax and deadlines vary for VAT across states. ClearTax experts can assist in tax registration, filing, and compliance.

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