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Difference Between VAT and GST

Last updated on February 16, 2018 by Surbhi S

One of the major reforms in the Indian Taxation System is the introduction of
GST, i.e. Goods and Services Tax. It aims at removing the cascading effect, i.e.
double taxation. GST is a tax on value addition, imposed on the production,
distribution and consumption of goods and services. It is commonly
contrasted with Value Added Tax, shortly known as VAT, which is an indirect
tax levied at each stage of manufacture and distribution of goods on the
incremental value.
The primary difference between VAT and GST is that while VAT applies to
the sale of goods, GST applies to the supply of goods and services. So, this
article will make clear, all the doubts and misconceptions, related to the two
types of tax regimes, in India, take a read.

Content: VAT Vs GST

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

BASIS FOR
VAT GST
COMPARISON

Meaning VAT is a consumption tax, GST is a destination based

that is levied on the value tax, charged on the
addition, at each stage of manufacture, sale and
production/distribution of consumption of goods and
goods. services.
 BASIS FOR
VAT GST
COMPARISON

Point of Sale of goods Supply of goods and

taxation services

Payment Mode Offline Online

Registration Compulsory if turnover is Compulsory if turnover is

greater than 10 lakhs. greater than 20 lakhs.

Basis of Summary based Transaction based

taxation

Revenue Seller state collects revenue Consumer state collects

Collection revenue

Excise Duty It is levied, on the It is not levied.

manufacture of excisable
goods.

Interstate Input credit is not possible in Input credit can be availed

sales case of interstate sales. in case of interstate sales.

Definition of VAT
Value Added Tax, or otherwise called as VAT, is a multi-point tax system,
wherein the tax is levied by the state government, at each level of
production/distribution of goods.

In this regime, the tax is levied on the incremental value of the goods, to
eliminate the cascading effect, at different levels of sale. It is a type of
consumption tax, wherein the value addition made by the firm is equal to the
difference between proceeds and the cost of purchases.

It allows the purchaser of the goods to avail input tax credit, i.e. the tax paid
at the previous stage will be deducted from the net tax liability. To avail the
input tax credit under VAT system, every dealer is required to obtain
registration.

In this system, the VAT is levied at different types of rates, 0% is for

agricultural goods and items of social importance, 1% gold and silver
jewellery, 4% raw material or inputs used in manufacturing and capital
goods, 20% for luxury items and remaining items are taxed as per normal
slab rate, i.e. 12.5%.

Definition of GST
GST stands for Goods and Services Tax, which is a destination based value
added tax charged on the production, sale and consumption of goods and
services. It is important to note that GST applies to the value addition at each
stage, and no other tax would be levied, which results in the elimination of
cascading effect.

In this system, the supplier of the goods or services is eligible to avail input
tax credit, i.e. the GST paid on the purchase of goods, will be set off against
the GST payable on the supply of goods and services. So, ultimately, the end
consumer, bears the tax imposed by the last supplier in the distribution
chain.
In India, Dual GST has been implemented, which is simultaneously levied by
the Central and State government to tax goods and services. The Centre
charges the tax on intrastate sales,  called as CGST. States charges tax on
the services, called SGST andUTGST in case of Union Territories. For the
interstate supply of goods and services that are taxable, are covered under
IGST, i.e. Integrated Goods and Services Tax.

There are many indirect taxes, which are subsumed after the introduction of
GST in India, which are as under:

At CGST level: Excise Duty, Service tax, surcharge and cess

At SGST level: Octroi or Entry tax, VAT, luxury tax, surcharge and cess
At IGST level: Central Sales Tax

GST slabs are fixed at 5%, 12%, 18% and 28%.

Key Differences Between VAT and GST

The fundamental differences between VAT and GST are explained, with
the help of following points:

1. VAT or Value Added Tax is an indirect tax, wherein tax is imposed

at the state level, at every stage of production and distribution of
goods and services, with credit for tax paid at the previous stage.
GST expands to Goods and Services Tax, which is a single tax,
levied on the supply of the goods and services that relies on the
principle of value addition.

2. While VAT is levied on the sale of goods, in GST the point of

taxation is the supply of goods and services.

3. The registration and payment under VAT regime are performed

offline, whereas GST is completely an online system, wherein the
registration, filing of return and all other function can be performed
 through a common GST portal managed by Goods and Services
Network (GSTN).

4. When it comes to registration of supplier, in VAT system the

registration becomes mandatory when the turnover of the supplier
is beyond Rs. 10 lakhs. On the contrary, if the aggregate turnover
of the supplier exceeds Rs. 20 lakhs, then he/she is required to
obtain registration under GST.

5. VAT system is a summary based system of taxation, wherein the

seller of the goods has to submit the return, at the end of the
particular period. Conversely, GST is a transaction based taxation
system.

6. In case of the VAT, the seller state collects the revenue, whereas,
in GST, the collection of revenue is done by the consumer state.

7. In VAT system, the manufacturer of excisable products is charged

excise duty on its production and VAT on intra-state sales, which
causes double taxation. On the other hand, excise duty is
subsumed in GST, and so there are no chances of double taxation
on such items.

8. Under VAT system, input tax credit cannot be availed, in case of

interstate sales. For instance: Suppose, on the manufacture of
cloth, central excise duty (CENVAT) is levied and VAT is imposed
on its sale within the state. Although both CENVAT and VAT both
are a value-added tax but set off is not possible because they
CENVAT is levied by the central government, and State
Government imposes VAT. Unlike, GST is based on the principle,
‘one nation one tax’, so input tax credit is available for the
interstate sales.

Conclusion
By and Large, VAT emerged as a reformation to the old sales tax to remove
the cascading effect, to a great extent. Likewise, GST was adopted over the
VAT, which subsumed other taxes, such as excise duty, surcharge, cess, entry
tax and so forth, which also improved the taxation system in India.

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