DIFFERENCE BETWEEN GST AND VAT

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE

DEGREE OF

MASTER OF COMMERCE

UNDER THE FACULTY OF COMMERCE

SAKSHI VIJAY BASUTKAR

UNDER THE GUIDING TEACHER

MS. SHWETA PANDEY

K. P. B. HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD, CHARNI ROAD EAST, GIRGAON,

MUMBAI – 400004

ACADEMIC YEAR 2021 – 2022

1|Page
 DIFFERENCE BETWEEN GST AND VAT

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE

DEGREE OF

MASTER OF COMMERCE

UNDER THE FACULTY OF COMMERCE

BY

SAKSHI VIJAY BASUTKAR

UNDER THE GUIDING TEACHER

MS. SHWETA PANDEY

K. P. B. HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD, CHARNI ROAD EAST, GIRGAON,

MUMBAI – 400004

ACADEMIC YEAR 2021 – 2022

2|Page
 K. P. B. HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD, CHARNI ROAD EAST, GIRGAON,

MUMBAI – 400004

Certificate

This is to certify that Ms. Sakshi Vijay Basutkar has worked and duly completed her Project

Work for the degree of Master in Commerce under the Faculty of Commerce in

the subject of Advanced Accounting and her/his project is entitled, ― Difference between GST
and VAT‖ under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no

part of it has been submitted previously for any Degree or Diploma of any

University.

It is her/ his own work and facts reported by her/his personal findings and investigations.

Seal of
the Name and Signature of Guiding Teacher
Colleg
e

Date of submission:

3|Page
 Declaration by learner

I the undersigned Miss Sakshi Vijay Basutkar here by, declare that the work embodied

in this project work titled ― Difference between GST and VAT‖, forms my own

contribution to the research work carried out under the guidance of Ms. Shweta Pandey is a

result of my own research work and has not been previously submitted to any other University

for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly indicated as

such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in

accordance with academic rules and ethical conduct.

Sakshi Vijay Basutkar

Roll no. 9
Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher

4|Page
 Acknowledgment
(Model structure of the acknowledgement)

To list who all have helped me is difficult because they are so numerous and the depth is so

enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the

completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this

project.

I would like to thank my Principal, Dr. (Ms) Minu B. Madlani for providing the necessary

facilities required for completion of this project.

I take this opportunity to thank our Coordinator Dr. Jagruti Darji, for her moral support and

guidance.

I would also like to express my sincere gratitude towards my project guide Ms. Shweta

Pandey whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and

magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the

completion of the project especially my Parents and Peers who supported me throughout my

project.

5|Page
 INDEX

Title of Chapter Page No.

Chapter No. 1 Introduction of the study

1.1 Introduction 9

1.2 Background of the Study 11

1.3 Objectives of the study 14

Chapter No. 2

2.1 Research Methodology 15

2.2 Research Design 15

2.3 Sources of data 15

6|Page
Chapter No. 3 Literature Review

3.1 Meaning and Definitions 16

3.2 Understanding Value Added Tax 18

3.3 History of Value Added Tax 19

3.4 Drawbacks of Value Added Tax 20

3.5 Understanding The Goods and Service Tax 23

3.6 Dual Goods and Service Tax Structure 23

Objectives of GST 24
3.7
Advantages of GST 27
3.8
Importance of GST over VAT 32
3.9

7|Page
Chapter No. 4 Data Analysis, Interpretation and

Presentation

4.1 What are the components of GST? 33

4.2 What are the New Compliances under GST? 34

4.3 India’s Adoption of the GST 35

4.4 Implementation of GST in place of VAT 37

4.5 Types of GST 39

4.6 Enrollment of GST 40

4.7 GST Return 44

4.8 Difference Between GST and VAT 45

Chapter No. 5 Conclusion and Suggestions

5.1 Calculations 49

5.2 Conclusion 56

5.3 Bibligraphy 57

8|Page
 CHAPTER 1

1.1 INTRODUCTION

Goods and Service Tax (GST) is a reform that gave the Indian Tax Collection System its
exceptional philosophy of 'one country, one tax.' The implementation of GST has eliminated
many indirect taxes in India, including Value Added Tax (VAT), Service charge, Octroi, and
Excise Duty. These different types of taxes resulted in individuals paying tax on tax. However,
with GST, the undesirable impact of tax was cut down in the economy. Therefore, by
understanding the difference between VAT and GST in India, the impact of both these taxes
and their impact can be understood.

Goods and Service Tax India is a reality today and it has brought the Indian taxation system
under its unique ideology ‘one nation, one tax’.

The rise of GST has subsumed all the indirect taxes in India, including Value Added Tax
(VAT), Service tax, Excise duty, and Octroi. These various forms of indirect taxes and VAT
were levied on each step of value addition of the product, thus creating a cascading effect. The
game of GST was introduced to bring down unwanted inflation in the economy. Both these

9|Page
 taxes are levied on the value of sale or supply of goods. But still, there are lots of differences
between VAT and GST India.

 What is VAT?

It is an indirect form of taxation levied on the 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 stages 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 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.

Every commodity passes through different stages of production and distribution before finally
reaching the consumer. At each stage of the production, value addition is made in the
distribution chain. And Value Added Tax (VAT) is a tax on this value addition at each stage.
A dealer under VAT collects tax on his sales, retains the tax paid on his purchase and pays the
balance to the government. Value Added Tax is a consumption-based tax because it is borne
ultimately by the final consumer.

 What is GST?

Goods and Service Tax 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.

10 | P a g e
Goods and Service Tax which was introduced as a new league in the indirect taxation system
replaced all most all Indirect Taxes in India. The Act which came into effect on 1 st July 2017
is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

Under GST, the tax is levied at every point of sale. In the case of inter-state sales, Integrated
GST will be levied and in case of intrastate supplies, CGST and SGST will be charged.

1.2 Background of the study

Value Added Tax or VAT was independently designed by two individuals named Wilhelm
Von Siemens and Thomas S. Adam in the early 20th century.
Germany and France were the first two nations to implement VAT.
This tax was perceived as an improved version of sales tax in the European countries.
Various countries incorporated the VAT during the 1960s, 1970s and 1980s.
VAT was introduced in India on April 1, 2005, and it replaced the existing general sales tax in
India.
States such as Rajasthan, UP, Gujarat, Madhya Pradesh and Chhattisgarh were excluded from
implementing VAT initially but later adopted the tax.

Formation of GST

The reform of India's indirect tax regime was started in 1986 by Vishwanath Pratap Singh,
Finance Minister in Rajiv Gandhi’s government, with the introduction of the Modified Value
Added Tax (MODVAT). Subsequently, Prime Minister P V Narasimha Rao and his Finance
Minister Man Mohan, initiated early discussions on a Value Added Tax (VAT) at the state
level. A single common "Goods and Services Tax (GST)" was proposed and given a go-ahead
in 1999 during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic
advisory panel, which included three former RBI governors IG Patel, Bimal Jalan and C
Rangarajan. Vajpayee set up a committee headed by the Finance Minister of West
Bengal, Asim Dasgupta to design a GST model.

11 | P a g e
The Asim Dasgupta committee which was also tasked with putting in place the back-end
technology and logistics (later came to be known as the GST Network, or GSTN, in 2015). It
later came out for rolling out a uniform taxation regime in the country. In 2002, the Vajpayee
government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, the
Kelkar committee recommended rolling out GST as suggested by the 12th Finance
Commission.

After the defeat of the BJP-led NDA government in the 2004 Lok Sabha election and the
election of a Congress-led UPA government, the new Finance Minister P Chidambaram in
February 2006 continued work on the same and proposed a GST rollout by 1 April 2010.
However, in 2011, with the Trinamool Congress routing CPI (M) out of power in West Bengal,
Asim Dasgupta resigned as the head of the GST committee. Dasgupta admitted in an interview
that 80% of the task had been done.

The UPA introduced the 115th Constitution Amendment Bill on 22 March 2011 in the Lok
Sabha to bring about the GST. It ran into opposition from the Bharatiya Janata Party and other
parties and was referred to a Standing Committee headed by the BJP's former Finance
Minister Yashwant Sinha. The committee submitted its report in August 2013, but in October
2013 Gujarat Chief Minister Narendra Modi raised objections that led to the bill's indefinite
postponement. The Minister for Rural Development Jairam Ramesh attributed the GST Bill's
failure to the "single handed opposition of Narendra Modi".

In the 2014 Lok Sabha election, the Bharatiya Janata Party (BJP)-led NDA government was
elected into power. With the consequential dissolution of the 15th Lok Sabha, the GST Bill –
approved by the standing committee for reintroduction – lapsed. Seven months after the
formation of the then Modi government, the new Finance Minister Arun Jaitley introduced the
GST Bill in the Lok Sabha, where the BJP had a majority. In February 2015, Jaitley set another
deadline of 1 April 2017 to implement GST. In May 2016, the Lok Sabha passed the
Constitution Amendment Bill, paving way for GST. However, the Opposition, led by the
Congress, demanded that the GST Bill be again sent back for review to the Select Committee
of the Rajya Sabha due to disagreements on several statements in the Bill relating to taxation.
Finally, in August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18 states

12 | P a g e
ratified the Constitution amendment Bill and the President Pranab Mukherjee gave his assent
to it.

A 21-member selected committee was formed to look into the proposed GST laws. After GST
Council approved the Central Goods and Services Tax Bill 2017 (The CGST Bill), the
Integrated Goods and Services Tax Bill 2017 (The IGST Bill), the Union Territory Goods and
Services Tax Bill 2017 (The UTGST Bill), the Goods and Services Tax (Compensation to the
States) Bill 2017 (The Compensation Bill), these Bills were passed by the Lok Sabha on 29
March 2017. The Rajya Sabha passed these Bills on 6 April 2017 and were then enacted as
Acts on 12 April 2017. Thereafter, State Legislatures of different States have passed respective
State Goods and Services Tax Bills. After the enactment of various GST laws, Goods and
Services Tax was launched all over India with effect from 1 July 2017. The Jammu and
Kashmir state legislature passed its GST act on 7 July 2017, thereby ensuring that the entire
nation is brought under a unified indirect taxation system. There was to be no GST on the sale
and purchase of securities. That continues to be governed by Securities Transaction Tax (STT).

Implementation

The GST was launched at midnight on 1 July 2017 by the President of India, and
the Government of India. The launch was marked by a historic midnight (30 June – 1 July)
session of both the houses of parliament convened at the Central Hall of the Parliament. Though
the session was attended by high-profile guests from the business and the entertainment
industry including Ratan Tata, it was boycotted by the opposition due to the predicted problems
that it was bound to lead for the middle and lower class Indians. The tax was strongly opposed
by the opposing Indian National Congress. It is one of the few midnight sessions that have been
held by the parliament - the others being the declaration of India's independence on 15 August
1947, and the silver and golden jubilees of that occasion. After its launch, the GST rates have
been modified multiple times, the latest being on 22 December 2018, where a panel of federal
and state finance ministers decided to revise GST rates on 28 goods and 53 services.

Members of the Congress boycotted the GST launch altogether. They were joined by members
of the Trinamool Congress, Communist Parties of India and the DMK. The parties reported
that they found virtually no difference between the GST and the existing taxation system,
13 | P a g e
 claiming that the government was trying to merely rebrand the current taxation system. They
also argued that the GST would increase existing rates on common daily goods while reducing
rates on luxury items, and affect many Indians adversely, especially the middle, lower middle
and poorer income groups.

1.3OBJECTIVE OF THE STUDY

 To understand the difference between the Value Added Tax (VAT) and Goods and
Service Tax (GST).
 To understand the importance of Goods and Services Tax
 To understand the drawbacks of Value Added Tax

14 | P a g e
 CHAPTER 2

2.1 RESEARCH METHODOLOGY

This chapter present research method and procedures adopted, the tasks involved on the
research have been carefully designed

2.2 RESEARCH DESIGN:

This study made use of survey research. It attempts to evaluate the importance of financial ratio
and the method used for the survival and growth of the small scale business especially during
the period of economic depression and instability

2.3 SOURCES OF DATA

The study made use of primary and secondary data.

1. Primary Data

This includes data gotten from personal interviews and questionnaires administered to
managerial staff, senior staff and junior staff.

2. Secondary Data

The secondary sources used include data from text books magazines, newspaper, financial
standards business times, dictionary and internet. The information collected through these
sources was mainly used in the literature review and data analysis of the study.

15 | P a g e
 CHAPTER 3

3.1 MEANING AND DEFINITION

DEFINITION

 Value-added tax (VAT)

Value-added tax (VAT) is a consumption tax on goods and services that is levied at each
stage of the supply chain where value is added, from initial production to the point of sale.
The amount of VAT the user pays is based on the cost of the product minus any costs of
materials in the product that have already been taxed at a previous stage.

Value-added tax, or VAT, is added to a product at every point of the supply chain where
value is added to it. Advocates of VATs claim that they raise government revenues without

16 | P a g e
 punishing the wealthy by charging them more through an income tax. Critics say that VATs
place an undue economic burden on lower-income taxpayers.

Although many industrialized countries have VAT, the United States is not one of them.

 Goods and services tax (GST)

The goods and services tax (GST) is a value-added tax levied on most goods and services
sold for domestic consumption. The GST is paid by consumers, but it is remitted to the
government by the businesses selling the goods and services.

The goods and services tax (GST) is a tax on goods and services sold domestically for
consumption.

The tax is included in the final price and paid by consumers at point of sale and passed to
the government by the seller.

The GST is a common tax used by the majority of countries globally. The GST is usually
taxed as a single rate across a nation
17 | P a g e
 3.2 Understanding Value-Added Tax (VAT)

VAT is based on consumption rather than income. In contrast to a progressive income tax,
which levies more taxes on the wealthy, VAT is charged equally on every purchase.

More than 160 countries use a VAT system. It is most commonly found in the European Union
(EU). Nevertheless, it is not without controversy. 1

Advocates say VAT raises government revenues without charging wealthy taxpayers more,
as income taxes do. It also is considered simpler and more standardized than a traditional sales
tax, with fewer compliance issues.

Critics argue that VAT is essentially a regressive tax that places an undue economic burden on
lower-income consumers while increasing the bureaucratic burden on businesses.

Both critics and proponents of VAT generally argue it as an alternative to income tax.
That is not necessarily the case because many countries have both an income tax and a
VAT.

How VAT works

VAT is levied on the gross margin at each point in the process of manufacturing, distributing,
and selling an item. The tax is assessed and collected at each stage. That is different from a
sales tax system, in which the tax is assessed and paid only by the consumer at the very end of
the supply chain.1

Say, for example, a candy called Dulce is manufactured and sold in the imaginary country of
Alexia. Alexia has a 10% VAT.

18 | P a g e
 Here is how the VAT would work:

1. Dulce’s manufacturer buys the raw materials for $2, plus a VAT of 20 cents—payable to the
government of Alexia—for a total price of $2.20.
2. The manufacturer then sells Dulce to a retailer for $5 plus a VAT of 50 cents, for a total of
$5.50. The manufacturer renders only 30 cents to Alexia, which is the total VAT at this point,
minus the prior VAT charged by the raw material supplier. Note that the 30 cents also equal
10% of the manufacturer’s gross margin of $3.
3. Finally, a retailer sells Dulce to consumers for $10 plus a VAT of $1, for a total of $11. The
retailer renders 50 cents to Alexia, which is the total VAT at this point ($1), minus the prior
50-cent VAT charged by the manufacturer. The 50 cents also represent 10% of the retailer’s
gross margin on Dulce.

3.3 History of Value-Added Tax (VAT)

VAT was largely a European creation. It was introduced by French tax authority Maurice
Lauré in 1954, although the idea of taxing each stage of the production process was said to
have first been floated a century earlier in Germany.5

The vast majority of industrialized countries that make up the Organisation for Economic Co-
operation and Development (OECD) have a VAT system. The United States remains a notable
exception.1

According to one International Monetary Fund (IMF) study, any nation that switches to VAT
initially feels the negative impact of reduced tax revenues. In the long run, however, the study
concluded that VAT adoption has in the majority of cases increased government revenue and
proved effective.6

VAT has earned a negative connotation in some parts of the world, even hurting its proponents
politically. In the Philippines, for example, Sen. Ralph Recto, a chief proponent of VAT in the
early 2000s, was voted out of office by the electorate when he ran for reelection. 7 8 However,
in the years that followed its implementation, the population eventually accepted the tax. Recto

19 | P a g e
ended up finding his way back to the Senate, where he became the proponent of an expanded
VAT.

3.4 VAT Drawbacks

VAT's are hugely regressive, with the cost falling mostly on the poor.

It will be difficult, if not impossible, to eliminate the IRS and the income tax system in the
U.S., so the VAT will be just another tax imposed on the American people.

If the VAT replaces state sales taxes, the states will raise a fuss. The state sales tax
system is extremely complex, with some states not charging state sales tax and others
taxing at different rates, including local option taxes charged by cities and counties.
Eliminating this mess could take many years.

VAT calculations would be terribly costly to businesses, which would have to calculate
VAT on every product, at every step of the process. These costs, of course, would be
passed on to consumers, along with the VAT rates.

1) VAT is regressive:

It is claimed that the tax is regressive, i.e its burden falls disproportionately on the poor
since the poor are likely to spend more of their income than the relatively rich person.
There is merit in this argument, particularly if it attempts to replace direct or indirect taxes
with steep, progressive rates. However, observation from around the world and even
Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act
as a disincentive to effort.

Further, there is now a tendency in most countries to reduce this progressivity of taxes as
has been done in Guyana where a flat rate of income tax has been introduced. In any case
VAT recognises and makes room for progressivity by applying no or low rates of tax on
essential items such as food, clothes and medicine. In addition it allows for steep rates of
tax on luxury items, although this can create problems for administration and open

20 | P a g e
opportunities for evasion by way of deliberate misclassification, a problem incidentally
not peculiar to VAT, and which takes place extensively in the area of customs duties.

2) VAT is too difficult to operate from the position of both the administration and
business:

(a) The administration: It is often argued that VAT places a special burden on tax
administration. However, it is worth noting that wherever VAT was introduced one of its
effects was the rationalization and simplification of the previous indirect tax system and
its administration. Each of the previous indirect taxes such as customs duties, purchase tax
and excise duties replaced by VAT had its own rate structure as well as a different tax
base and separate administrative procedure. The consolidation and incorporation of
numerous indirect taxes into the VAT would simplify the rate structure, tax base, and
administration of the indirect tax system, thereby eliminating the overlapping auditing
practices that had plagued those systems.

In addition, the abolition of a number of alternative indirect taxes releases experienced

personnel to focus on a single tax. It also means reduction in the number of forms used,
legislation to be applied and returns and accounts with which the business person has to
contend.

(b) Business: It is true that the VAT is collected from a larger number of firms than under
any form of income tax or single state sales tax; to the typical smaller firms the
complexities of the tax and the need for more extensive records (for example, to justify
deductions) are likely to prove serious. However, it is often overlooked that businesses
already function with considerable administrative responsibility for a number of laws
including the National Insurance Act and the Income Tax Act.

Under the Income Tax (Accounts and Records) Regulations of 1980 every person, without
exception is required to maintain detailed and extensive records of all its transactions.
Compliance with this will certainly ensure compliance with VAT regulations, and since
there is an actual benefit to be derived from accounting for VAT paid on input there is an
incentive for proper record-keeping.
21 | P a g e
As we have noted before, VAT also allows for the exemption of small businesses from
the system.

Under any form of sales taxation, small businesses have to be granted special treatment
because of their inability to cope with the requirements of keeping adequate records which
larger enterprises can handle at a reasonable cost. The intent of the special treatment is to
reduce the administrative burden on small enterprises, but not the taxes that normally
would be charged on the goods and services they supply. The revenue loss at the final link
in the commercial cycle is limited only to the value added at that stage, whereas in the
case of income tax or sales tax the entire tax is lost. To recover the loss from exemptions,
a flat tax on turnover may be applied.

3. VAT is inflationary:

Some businessmen seize almost any opportunity to raise prices, and the introduction of
VAT certainly offers such an opportunity. However, temporary price controls, a careful
setting of the rate of VAT and the significance of the taxes they replace should generally
ensure that there is no increase if any in the cost of living. To the extent that they lead to
a reduction in income tax, any price increases may be offset by increases in take-home
pay. In any case, any price consequence is one time only and prices should stabilise
thereafter.

4. VAT favours the capital intensive firm:

It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm
compared to the capital- intensive competitor, since the ratio of value added to selling
price is greater for the former. This is a real problem for labour-intensive economies and
industries.

22 | P a g e
 3.5 Understanding the Goods and Services Tax (GST)

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of
certain goods and services. The business adds the GST to the price of the product, and a
customer who buys the product pays the sales price inclusive of the GST. The GST portion is
collected by the business or seller and forwarded to the government. It is also referred to
as Value-Added Tax (VAT) in some countries.

How the Goods and Services Tax (GST) System Works

Most countries with a GST have a single unified GST system, which means that a single tax
rate is applied throughout the country. A country with a unified GST platform merges central
taxes (e.g., sales tax, excise duty tax, and service tax) with state-level taxes (e.g., entertainment
tax, entry tax, transfer tax, sin tax, and luxury tax) and collects them as one single tax. These
countries tax virtually everything at a single rate.

3.6 Dual Goods and Services Tax (GST) Structures

Only a handful of countries, such as Canada and Brazil, have a dual GST structure. Compared
to a unified GST economy where tax is collected by the federal government and then
distributed to the states, in a dual system, the federal GST is applied in addition to the state
sales tax. In Canada, for example, the federal government levies a 5% tax and some
provinces/states also levy a provincial state tax (PST), which varies from 7% to 10%. In this
case, a consumer's receipt will clearly have the GST and PST rate that was applied to their
purchase value.

More recently, the GST and PST have been combined in some provinces into a single tax
known as the Harmonized Sales Tax (HST). Prince Edward Island was the first to adopt the
HST in 2013, combining its federal and provincial sales taxes into a single tax. Since then,

23 | P a g e
 several other provinces have followed suit, including New Brunswick, Newfoundland and
Labrador, Nova Scotia, and Ontario.

3.7 OBJECTIVES OF GST

1. To achieve the ideology of ‘One Nation, One Tax’

GST has replaced multiple indirect taxes, which were existing under the previous tax regime.
The advantage of having one single tax means every state follows the same rate for a particular
product or service. Tax administration is easier with the Central Government deciding the
rates and policies. Common laws can be introduced, such as e-way bills for goods transport
and e-invoicing for transaction reporting. Tax compliance is also better as taxpayers are not
bogged down with multiple return forms and deadlines. Overall, it’s a unified system of
indirect tax compliance.

2. To subsume a majority of the indirect taxes in India

India had several erstwhile indirect taxes such as service tax, Value Added Tax (VAT),
Central Excise, etc., which used to be levied at multiple supply chain stages. Some taxes were
governed by the states and some by the Centre. There was no unified and centralised tax on
both goods and services. Hence, GST was introduced. Under GST, all the major indirect taxes
were subsumed into one. It has greatly reduced the compliance burden on taxpayers and eased
tax administration for the government.

3. To eliminate the cascading effect of taxes

One of the primary objectives of GST was to remove the cascading effect of taxes. Previously,
due to different indirect tax laws, taxpayers could not set off the tax credits of one tax against
the other. For example, the excise duties paid during manufacture could not be set off against
the VAT payable during the sale. This led to a cascading effect of taxes. Under GST, the tax
24 | P a g e
 levy is only on the net value added at each stage of the supply chain. This has helped eliminate
the cascading effect of taxes and contributed to the seamless flow of input tax credits across
both goods and services.

4. To curb tax evasion

GST laws in India are far more stringent compared to any of the erstwhile indirect tax laws.
Under GST, taxpayers can claim an input tax credit only on invoices uploaded by their
respective suppliers. This way, the chances of claiming input tax credits on fake invoices are
minimal. The introduction of e-invoicing has further reinforced this objective. Also, due to
GST being a nationwide tax and having a centralised surveillance system, the clampdown on
defaulters is quicker and far more efficient. Hence, GST has curbed tax evasion and
minimised tax fraud from taking place to a large extent.

5. To increase the taxpayer base

GST has helped in widening the tax base in India. Previously, each of the tax laws had a
different threshold limit for registration based on turnover. As GST is a consolidated tax
levied on both goods and services both, it has increased tax-registered businesses. Besides,
the stricter laws surrounding input tax credits have helped bring certain unorganised sectors
under the tax net. For example, the construction industry in India.

6. Online procedures for ease of doing business

Previously, taxpayers faced a lot of hardships dealing with different tax authorities under each
tax law. Besides, while return filing was online, most of the assessment and refund procedures
took place offline. Now, GST procedures are carried out almost entirely online. Everything is
done with a click of a button, from registration to return filing to refunds to e-way bill

25 | P a g e
 generation. It has contributed to the overall ease of doing business in India and simplified
taxpayer compliance to a massive extent. The government also plans to introduce a centralised
portal soon for all indirect tax compliance such as e-invoicing, e-way bills and GST return
filing.

7. An improved logistics and distribution system

A single indirect tax system reduces the need for multiple documentation for the supply of
goods. GST minimises transportation cycle times, improves supply chain and turnaround
time, and leads to warehouse consolidation, among other benefits. With the e-way bill system
under GST, the removal of interstate checkpoints is most beneficial to the sector in improving
transit and destination efficiency. Ultimately, it helps in cutting down the high logistics and
warehousing costs.

8. To promote competitive pricing and increase consumption

Introducing GST has also led to an increase in consumption and indirect tax revenues. Due to
the cascading effect of taxes under the previous regime, the prices of goods in India were
higher than in global markets. Even between states, the lower VAT rates in certain states led
to an imbalance of purchases in these states. Having uniform GST rates have contributed to
overall competitive pricing across India and on the global front. This has hence increased
consumption and led to higher revenues, which has been another important objective
achieved.

26 | P a g e
3.8 ADVANTAGES OF GST

GST has mainly removed the cascading effect on the sale of goods and services. Removal of
the cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax
on tax, the cost of goods decreases.

Also, GST is mainly technologically driven. All the activities like registration, return filing,
application for refund and response to notice needs to be done online on the GST portal,
which accelerates the processes.

The Goods and Services Tax (GST) has several benefits that help in integrating the economy
while making Indian products more competitive internationally. It also makes compliance
with tax rates and procedures easier.

The Goods and Services Tax (GST) is imposed on the supply of products and/or services
within the country. It subsumes multiple indirect taxes that are imposed by the State
Governments or the Central Government, such as Service Tax, Purchase Tax, Central Excise
Duty, Value Added Tax, Entry Tax, Luxury Tax, Local Body Taxes, etc.

GST offers benefits to the government, the industry, as well as the citizens of India. The price
of goods and services is expected to reduce under the new reform, while the economy will
receive a healthy boost. It is also expected to make Indian products and services
internationally competitive.

 Uniformity in Taxation

The objective of GST is to drive India towards becoming an integrated economy by charging
uniform tax rates and eliminating economic barriers, thereby making the country a common
national market. The subsuming of the aforementioned State and Central indirect taxes into
just one tax will also provide a major lift to the Government’s ‘Make in India’ campaign, as

27 | P a g e
 goods that are produced or supplied in the country will be competitive not only in national
markets, but in the international ones as well. Moreover, IGST (Integrated Goods and
Services Tax) will be levied on all imported goods. IGST will be equal to State GST + Central
GST, more or less, thus bringing uniformity in taxation on both local as well as imported
goods.

 Helping Government Revenue Find Buoyancy

GST is forecast to help the Government Revenue find buoyancy by expanding the tax base
whilst enhancing the taxpayer compliance. The reform is also expected to improve the
country’s ranking so far as the ‘Ease of Doing Business Index’ is concerned. To add to it, it
is also estimated to enhance the GDP by 1.5% - 2%.

 Cascading of Taxes

The cascading of taxes will be prevented by GST as the whole supply chain will get an all-
inclusive input tax credit mechanism. Business operations can be streamlined at each stage
of supply thanks to the seamless accessibility to input tax credit across products or services.

 Simpler and Lesser Number of Compliances

Compliance will be simpler through the harmonisation of tax rates, procedures, and laws.
Synergies and efficiencies are expected across the board thanks to common formats/forms,
common definitions, and common interface via the GST portal. Inter-state disputes such as
those on e-commerce taxation and entry tax that currently prevail will no longer cause
concerns, while multiple taxation on the same transactions will also be removed. Compliance
costs will also reduce as a result.

The previous tax regime had service tax and VAT, and they both had their own compliances
and returns. GST will merge them and lower the number of returns as well as the time spent
on tax compliances. GST has around 11 returns under it. Four of them are basic returns that
are applicable to all taxable entities under GST. Although the number of returns could
28 | P a g e
 increase, the main GSTR-1 shall be manually populated, while GSTR-2, GSTR-3, AND
GSTR-4 shall be auto-populated.

 Common Procedures

The procedures for refund of taxes and registration of taxpayers will be common, while the
formats of tax return will be uniform. The tax base will also be common, as will the system
of assortment of products or services in addition to the timelines for each activity, thereby
ensuring that taxation systems have greater certainty.

 Common Portal

Since technology will be used heavily to drive GST, taxpayers will have a common portal
(GSTN). The procedures for different processes like registration, tax payments, refunds,
returns, etc., will be automated and simplified. Whether it is the filing of returns, filing of
refund claims, payment of taxes, or even registration, all processes will be done online via
GSTN. The verification of input tax credit will be done online too, and input tax credit across
the country will be matched electronically, thereby turning the process into an accountable
and transparent one. As a result, the process will also be much quicker since the taxpayer will
not have to interact with the tax administration.

 Lowered Tax Burden on Industry and Trade

The average tax burden on industry and trade is expected to lower because of GST, resulting
in a reduction of prices and increased consumption, which will eventually increase
production and ultimately enhance the development of various industries. Domestic demand
is set to increase and local businesses will have greater opportunities, thus generating more
jobs within the country.

Certain sectors in the country, such as textile and construction, are highly unorganised and
unregulated. GST aims to ensure that payments and compliances are done online, and input
credit can only be availed when the supplier accepts the amount, thus ensuring that these
industries have regulation and accountability.

29 | P a g e
 Composition Scheme

Small businesses can find respite from tax burdens through the composition scheme. Small
businesses that earn turnovers ranging from Rs.20 lakh to Rs.50 lakh will be subject to lower
taxes.

These are some of the main benefits offered by GST. In the following sections we shall take
a brief look at the advantages of the regime to the common man, the economy, and industry
and trade.

 Benefits to the Common Man

A good number of products and/or services are either exempt from tax or charged at 5% or
less.
The poor will receive their due.
Small traders will find themselves on a level playing field.
Simplified tax structure with fewer exemptions.
Products and services will be allowed to move freely across the country.
Increased competition between manufacturers and businesses will benefit consumers.
Items such as movie-ticket prices, two-wheelers, televisions, stoves, washing machines,
SUVs and luxury cars, two-wheelers, etc. will be cheaper.

 Benefits to the Economy

Creation of a unified common market.

 Regulation of Unorganised Industries

Increase in manufacturing processes.

30 | P a g e
 Enhancement of exports and investments.

Generation of more jobs through enhanced economic activity.

 Benefits to Industry and Trade

Uniform procedures for registration, filing of returns, payment of taxes, and tax refunds.

Elimination of cascading of taxes thanks to the seamless flow of tax credit from the supplier
or manufacturer to the retailer or user.

Small scale suppliers can make the most of the composition scheme to make their goods less
expensive.

Higher efficiency with regards to the neutralisation of taxes so that exports are globally
competitive.

31 | P a g e
3.9 IMPORTANCE OF GST OVER VAT

 GST rollout will bring a uniform tax policy across the length and breadth o the country
allowing India to function as one single market. The same goods and services procured
in any state will attract the same rate of tax.

 GST rollout will eliminate the complications in the tax structure particularly in the case
of inter-state manufacturing/production and sales. Previously, if a manufacturer were to
sell products to a wholesaler or retailer in a different state, the transaction would be
subject to Central Sales Tax (CST) and other taxes imposed by the state governments
(LBT). This means that the manufacturer would need to comply with the taxation
system in both the states. This will no be necessary with GST implementation.

 The transportation of goods across states created another challenge. About 40 percent
of the time taken for the transport of goods was spent in clearances at state border check
posts. Middlemen took advantage of this and corruption was rampant. GST eliminates
all these illegal practices and allows for one single compliance mechanism and quicker
delivery time.

 The benefits of GST implementation will translate into reduced tax burden on the tax
payer since it does away will all other indirect taxes.

 GST implementation will reduce the import and export duties previously borne by the
tax payer.

 Over half the items in the CPI basket have been placed in the zero tax slab. This means
basics such as food, cereals, and vegetables will not be taxed. As we move up from
basics to essentials to luxury and on to sin items the tax slab increases. This makes all
basics of life affordable to the lower and middle income groups.

32 | P a g e
 CHAPTER 4

4.1 What are the components of GST?

There are three taxes applicable under this system: CGST, SGST & IGST.

CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a
transaction happening within Maharashtra)

SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction
happening within Maharashtra)

IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra
to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime Revenue Distribution

Regime

Sale within CGST + VAT + Central Revenue will be shared equally

the State SGST Excise/Service between the Centre and the State
tax

Sale to IGST Central Sales There will only be one type of

another State Tax + tax (central) in case of inter-state
Excise/Service sales. The Centre will then share
Tax the IGST revenue based on the
destination of goods.

33 | P a g e
4.2 What are the New Compliances Under GST?

Apart from online filing of the GST returns, the GST regime has introduced several new
systems along with it.

 e-Way Bills

GST introduced a centralised system of waybills by the introduction of “E-way bills”. This
system was launched on 1st April 2018 for inter-state movement of goods and on 15th April
2018 for intra-state movement of goods in a staggered manner.

Under the e-way bill system, manufacturers, traders and transporters can generate e-way bills
for the goods transported from the place of its origin to its destination on a common portal
with ease. Tax authorities are also benefited as this system has reduced time at check -posts
and helps reduce tax evasion.

 E-invoicing

The e-invoicing system was made applicable from 1st October 2020 for businesses with an
annual aggregate turnover of more than Rs.500 crore in any preceding financial years (from
2017-18). Further, from 1st January 2021, this system was extended to those with an annual
aggregate turnover of more than Rs.100 crore.

These businesses must obtain a unique invoice reference number for every business-to-
business invoice by uploading on the GSTN’s invoice registration portal. The portal verifies
the correctness and genuineness of the invoice. Thereafter, it authorises using the digital
signature along with a QR code.

e-Invoicing allows interoperability of invoices and helps reduce data entry errors. It is
designed to pass the invoice information directly from the IRP to the GST portal and the e-
way bill portal. It will, therefore, eliminate the requirement for manual data entry while filing
GSTR-1 and helps in the generation of e-way bills too.

34 | P a g e
4.3 India's Adoption of the Goods and Services Tax (GST)

India established a dual GST structure in 2017, which was the biggest reform in the country's
tax structure in decades. The main objective of incorporating the GST was to eliminate tax on
tax, or double taxation, which cascades from the manufacturing level to the consumption
level.

For example,

a manufacturer that makes notebooks obtains the raw materials for, say, Rs. 10, which
includes a 10% tax. This means that they pay Rs. 1 in tax for Rs. 9 worth of materials. In the
process of manufacturing the notebook, the manufacturer adds value to the original materials
of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The 10% tax due on the finished good
will be Rs. 1.50. Under a GST system, the previous tax paid can be applied against this
additional tax to bring the effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50.

In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at a Rs.
2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be Rs. 1.75,
which the wholesaler can apply against the tax on the original cost price from the manufacturer
(i.e., Rs. 15). The wholesaler's effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 = Rs. 0.25.

Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) –
Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1 + Rs.
0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90.

India has, since launching the GST on July 1, 2017, implemented the following tax rates:

 A 0% tax rate applied to certain foods, books, newspapers, homespun cotton cloth, and hotel
services.
 A rate of 0.25% applied to cut and semi-polished stones.
 A 5% tax on household necessities such as sugar, spices, tea, and coffee.
 A 12% tax on computers and processed food.
 An 18% tax on hair oil, toothpaste, soap, and industrial intermediaries.

35 | P a g e
 The final bracket, taxing goods at 28%, applies to luxury products, including refrigerators,
ceramic tiles, cigarettes, cars, and motorcycles.

The previous system with no GST implies that tax is paid on the value of goods and margin
at every stage of the production process. This would translate to a higher amount of total taxes
paid, which is carried down to the end consumer in the form of higher costs for goods and
services. The implementation of the GST system in India is, therefore, a measure that is used
to reduce inflation in the long run, as prices for goods will be lower.

36 | P a g e
4.4 IMPLEMENTATION OF GST IN PLACE OF VAT

Indian Economy after Implementation of GST

Goods and Service Tax Act was first brought by Loksabha on 29th March 2017 and was
implemented on 1st July 2017. Law took initiative and combined most of the indirect taxes that
existed during that period. Moreover, the multiple taxes implemented by the government GST
(12%) + State GST (12%). The central excise duty, additional excise duty, special additional duty
& service tax were merged into a single tax.

Benefits by the adoption of GST

The benefits are as follows-

 Removal of cascading system;

 Possibility of hike in the revenue;
 Lessening the burden on the end consumer;
 Individual can lead simpler life at lower cost;
 Improvement in the low performing states;

37 | P a g e
  Control in black money circulation;
 Common market to perform trade activities.
 Boost in make in India project;
 Better and best investment planning;

The Short-Term Impact of Implementation of GST

From the customer’s viewpoint, they are now paying more tax for almost every goods and services
they consume. The majority of everyday products draw the same or a slightly higher tax rate.

Moreover, the Implementation of GST has a compliance cost attached to it. It seems that this
compliance cost will be high-priced for the small scale manufacturers and sellers. They can end
up pricing their products at higher rate.

Future Scenario- Implementation of GST

Talking about the future scenario, it is anticipated that GST would not just mean a lower tax rate,
but also minimum tax slabs. Countries where the GST has helped in improving the economy, apply
only for 2-3% rates – one being a lower rate for essential commodities, and a higher rate of tax for
the luxurious commodities.

Presently in India, we have 5 tax slabs, with 3 tax rates – an integrated rate, a central rate, and a
state rate + cess. The government is playing on lower rates due to fear of losing out revenue. This
is very doubtful to see a shift anytime soon; though the government has said that rates may be
revisited once the Revenue Neutral Rate is reached.

38 | P a g e
4.5 Types of GST:

The four distinct types of GST are given as under:

State Goods and Services Tax: SGST is charged for offering services and goods inside a state.

Central Goods and Services Tax: CGST is charged on intrastate services and goods.

Union Territory Goods and Services Tax: UTGST is required on the services and goods in any
Union Territories in the nation, viz. Daman and Diu, Andaman and Nicobar Islands, Dadra and
Nagar Haveli, Chandigarh, and Lakshadweep. UTGST is collected alongside CGST.

Integrated Goods and Services Tax: IGST is charged between state exchanges of services and
goods.

Who is Eligible for GST?

GST Registration must be completed by the following individuals and businesses:

 Individuals who have registered under the tax services before the GST law came into effect.
 Non-Resident Taxable Person and Casual Taxable Person
 Individuals who pay tax under the reverse charge mechanism
 All e-commerce aggregators
 Businesses that have a turnover that exceeds Rs.40 lakh. In the case of Uttarakhand,
Himachal Pradesh, Jammu & Kashmir, and North-Eastern states, the turnover of the
business should exceed Rs.10 lakh.
 Input service distributors and agents of a supplier
 Individuals who supply goods through an e-commerce aggregator.
 Individuals providing database access and online information from outside India to people
who live in India other than those who are registered taxable persons.
39 | P a g e
4.6 Enrollment of GST:

The process by which a taxpayer gets registered under Goods and Service Tax (GST) is GST
registration. Once the registration process has been completed, the Goods and Service Tax
Identification Number (GSTIN) is provided. The 15-digit GSTIN is provided by the Central
Government and helps to determine whether a business is liable to pay GST.

It is compulsory for all Service suppliers, purchasers, and dealers to get registered under GST.

A business that makes Rs 20 lakhs and more in a financial year are liable to register under GST.

The enrolled individuals or organisations will get a one of a kind enlistment number called Goods
and Service Tax Identification Number or GSTIN.

How to check your GSTIN?

Goods and Service Tax Identification Number or GSTIN is a 15-digit code that is given to citizens
or business entities. The GSTIN will be given on the basis of the state you live in and the
Permanent Account Number or PAN.

The following depicts how you can understand your GSTIN number:

40 | P a g e
The first two numbers depict the state code of the registered person

The next ten numbers are the PAN of the registered person

The following number is the entity number of the PAN

The next character Z is a default character

The last number is a check code for detecting errors. It can be either an alphabet or a number

The benefits of having GSTIN are:

With GSTIN, it’s easy to check for authenticity of a business

It has an easy verification process

Prevents fraudulent transactions

You can get discounts by claiming GST input tax credit

Profitability in credits can be obtained using this number

Steps to complete GST registration process online

The step-by-step procedure that individuals must follow to complete GST Registration is
mentioned below:

Step 1: Visit the GST portal - https://www.gst.gov.in

Step 2: Click on the ‘Register Now’ link which can be found under the ‘Taxpayers’ tab

Step 3: Select ‘New Registration’.

Step 4: Fill the below-mentioned details:

 Under the ‘I am a’ drop-down menu, select ‘Taxpayer’.

41 | P a g e
  Select the respective state and district.
 Enter the name of the business.
 Enter the PAN of the business.
 Enter the email ID and mobile number in the respective boxes. The entered email ID and
mobile number must be active as OTPs will be sent to them.
 Enter the image that is shown on the screen and click on ‘Proceed’.

Step 5: On the next page, enter the OTP that was sent to the email ID and mobile number in the
respective boxes.

Step 6: Once the details have been entered, click on ‘Proceed’.

Step 7: You will be shown the Temporary Reference Number (TRN) on the screen. Make a note
of the TRN.

Step 8: Visit the GST portal again and click on ‘Register’ under the ‘Taxpayers’ menu.

Step 9: Select ‘Temporary Reference Number (TRN)’.

Step 10: Enter the TRN and the captcha details.

Step 11: Click on ‘Proceed’.

Step 12: You will receive an OTP on your email ID and registered mobile number. Enter the OTP
on the next page and click on ‘Proceed’.

Step 13: The status of your application will be available on the next page. On the right side, there
will be an Edit icon, click on it.

Step 14: There will be 10 sections on the next page. All the relevant details must be filled, and the
necessary documents must be submitted. The list of documents that must be uploaded are
mentioned below:

1. Photographs

42 | P a g e
 2. Business address proof
3. Bank details such as account number, bank name, bank branch, and IFSC code.
4. Authorisation form
5. The constitution of the taxpayer.

Step 15: Visit the ‘Verification’ page and check the declaration, Then submit the application by
using one of the below mentioned methods:

 By Electronic Verification Code (EVC). The code will be sent to the registered mobile
number.
 By e-Sign method. An OTP will be sent to the mobile number linked to the Aadhaar card.
 In case companies are registering, the application must be submitted by using the Digital
Signature Certificate (DSC).

Step 16: Once completed, a success message will be shown on the screen. The Application
Reference Number (ARN) will be sent to the registered mobile number and email ID.

Step 17: You can check the status of the ARN on the GST portal.

Documents required for GST Registration

Here are the documents required to complete GST Registration:

 PAN card
 Aadhaar card
 Business address proof
 Bank account statement and cancelled cheque
 Incorporation Certificate or the business registration proof
 Digital Signature
 Director’s or Promoter’s ID proof, address proof, and photograph
 Letter of Authorisation or Board Resolution from Authorised Signatory

43 | P a g e
4.7 GST Returns:

A GST Return is a document that contains data about the pay that a taxpayer should record with
the authorities.

GST returns is used for the calculation of the net tax liability of an individual or business.

This data is utilised to process the taxpayer's assessment risk.

Under GST, enrolled sellers should document their GST to get back insights regarding their buys,
deals, input tax break, and yield GST.

Organisations are relied upon to record two monthly returns as well as yearly returns.

How has GST removed VAT’s Cascading Effect?

This tax collection framework, GST was established by eliminating the VAT system which was
resulting in a cascading tax effect. The negative impact could be identified on the end buyer who
had to pay the tax imposed on all stages of the production of goods or services.

However, with GST this negative impact has been eliminated. This tax has supplanted various
state-level expenses which have proved to be beneficial for various businesses as well as
consumers.

44 | P a g e
4.8 Difference between GST and VAT

The principle contrasts among VAT and GST could be perceived from the accompanying table:

Differences VAT regime GST regime

Taxable Event 1. VAT is imposed on the sale 1. GST is imposed on every

of goods. supply, and supply includes
goods and services.

2. It is a summary based tax that

occurs on the sale of goods. 2. It is a transaction-based tax that
occurs on the supply point.

Taxes and Laws in VAT rates vary in each state. Uniform duty rates all over India
each state

For States, we have State GST Act

(SGST)

For intrastate supplies of services or

goods, there is Central GST Act
(CGST)

For provisions made between the

states, we have the Integrated GST Act
(IGST).

45 | P a g e
 For Union regions engaged with an
inventory exchange, we have Union
Territory GST Act (UGST).

Registration Policy Individuals or business entities need Individuals or business entities need to
to register if they have a turnover of register if they have a turnover of more
less than Rs 10 lakhs. than Rs 20 lakhs.

Authorities that Is a tax collected by respective state Goods and Service Tax is equally
regulate Tax legislatures. shared by the state/central government.

Is collected by the seller’s state. Is collected by the consumer’s state.

Input Tax Credit No ITC is available for customs duty ITC is available under GST where a
(ITC) paid. taxpayer can claim the credit on
supplies received.

Payment Mode Can be paid only offline. Can be paid both online (mandatory if
GST to be paid is more than Rs
10,000) and offline.

Abidances Goods' movement : Goods' movement :

Compliance for the movement of Compliance for the movement of

goods varies in different states. goods between states is similar.

Returns: Improved on Returns:

46 | P a g e
 The dates for return filing are the The return filings are to be done every
10th, 15th and 20th of next month for 20th of the next month for each
each preceding month. preceding month.

The Government of India had The Government of India had

Date of introduced VAT on 1st April 2005. introduced GST on 1st July 2017.
Commencement

Taxation Rates and The VAT rate and the taxation laws The GST rate is uniform for each state
Laws under it are different for each state in in India. When it comes to taxation
India. 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.

Authority Since the state government collects The Central GST and State GST gets
the VAT, they have total authority collected from every sale, and the tax
over the tax proceeds. amount then gets bifurcated between
the two governments.

Mode of Payment VAT is payable only through offline GST is payable both through the
mode. online and offline mode.

The compliances system for the The compliances system for the
Compliances movement of goods between states is movement of goods between states is
different from one state to another. similar across different states.

Tax Collection The responsibility for the collection The responsibility for the collection of
of tax lies with the seller’s state. tax lies with the consumer state.

47 | P a g e
Input Tax Credit The taxpayer can claim the benefit of The benefit of Input Tax Credit is not
Input Tax Credit on the supplies available.
received by them.

48 | P a g e
 CHAPTER 5

5.1 CALCULATIONS

 How Value Added Tax and GST are calculated?

Though, as per eminent economists, VAT and GST are merely two names for one tax, but on
scrutinizing minutely, one can observe the contrast.

The following example on Gst vs Vat calculation can explain the difference clearly.

1) Under the VAT system

Suppose the consultant charged a 15% professional tax on services rendered worth Rs.
1,00,000.
Thus, the output taxable liability of the same will be Rs. 1,00,000 x 15% = Rs. 15,000.

At that point, in he event that if the office supplies were bought for Rs. 30,000, paying 5% as
Value Added Tax will amount to Rs. 1500 (Rs. 30,000 x 5%)

In this case, the whole amount, i.e. Rs. 16,500 (Rs. 15,000 + Rs. 1500) needs to be paid as the
tax paid on the supplies from the output tax liability on services rendered under the Vat system
cannot be deducted.

2) Under GST regime:

Suppose the consultant charged 18% of professional tax on services rendered worth Rs.
1,00,000.
Thus, the output taxable liability of the same will be Rs. 1,00,000 x 18% = Rs. 18,000.

If the office supplies were bought for Rs. 30,000, paying 5% as GST will amount to Rs. 1500
(30,000 x 5%)

In this case, the amount payable will be Rs. 16,500 (Rs. 18,000 – 1500) as unlike VAT, GST
has the facility to deduct the tax liability on services rendered.

49 | P a g e
  Calculating Value Added Tax (VAT)

To calculate the amount of value added tax that must be paid at each stage, take the VAT amount
at the latest stage of production and subtract the VAT that’s already been paid. It prevents double
taxation and ensures that buyers at each stage get reimbursed for the VAT they’ve previously paid.

VAT is actually calculated as the difference between input tax and output tax.

VAT = Output Tax – Input Tax

Where output tax is the tax received by the seller for the sale of his goods and services and input
tax is the tax paid by the seller for raw materials required to manufacture his goods and services.

Example: Calculating VAT

1. Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials. Input
tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000

Now after selling the food made by using the purchased raw materials, Ram was able to make
Rs.1,00,000. Supposing 10% output tax, output tax becomes Rs.10,000

So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000

2. Consider the following example with a 10% VAT assessed at each stage.

A bike manufacturer purchases raw materials for $5.50, which includes a 10% VAT. After
completing the manufacturing of the parts, they are purchased by the assembler for $11, which
includes a VAT of $1. The manufacturer receives $11, of which he pays $0.50 to the
government.

The full $1 VAT is not paid to the government, as the manufacturer will keep the portion of
VAT that he already paid to the seller of the raw materials. Since the manufacturer paid $0.50
in VAT to the seller of the raw materials, he will pay only a VAT of $0.50 ($1 – $0.50) to the
government (i.e., the incremental VAT).

50 | P a g e
Similarly, VAT paid at each stage can be calculated by subtracting the VAT that’s already
been charged from the VAT at the latest stage of purchase/production.

As already mentioned, the entire VAT is ultimately passed to the final buyer(s), as consumers
at the previous stages of purchase are reimbursed for the VAT they’ve paid. As seen below,
the final retail consumer pays the entire sum of the VAT paid by the other buyers at prior
stages. The final consumer’s VAT can also be calculated by multiplying the price (excl. VAT)
by the VAT rate (i.e., $30 * 10% = $3).

51 | P a g e
3. Manufactured cost of a pen = Rs. 2,727/- ; Margin added by manufacturer at time of sale = 10%
= Rs. 273 (value addition by manufacturer) ; Excise duty leviable on the product @ 12.5% =
Rs. 375/- ; VAT levied by State authority @ 14.5 % on ?

Let us now compute using the following information at hand and arrive at the GST vs. VAT
calculation to understand the difference between VAT and GST

52 | P a g e
 GST Calculation Formula

The below mentioned formula is for calculating GST by taxpayer

Formula for GST calculation:

Add GST:

GST Amount = (Original Cost x GST%)/100

Net Price = Original Cost + GST Amount

Remove GST:

GST Amount = Original Cost - [Original Cost x {100/(100+GST%)}]

Net Price = Original Cost - GST Amount

Example of GST Calculation

1. In case a product is sold for Rs.2,000 and the GST rate applicable to it is 12%, then net price
of the product will be Rs.2,000 + 12% of Rs.2,000 = Rs.2,000 + Rs.240 = Rs.2,240.

Under the GST regime, manufacturers and dealers can benefit from input tax credit. Below is
an example to show the difference in the amount of tax payable under the old tax system and
the GST system:

Value to Manufacturer Old Tax system GST System

Cost of production Rs.2,00,000 Rs.2,00,000

Profit Margin of 10% Rs.20,000 Rs.20,000

53 | P a g e
Value to Manufacturer Old Tax system GST System

Excise duty of 12% Rs.24,000 -

Total production cost Rs.2,44,000 Rs.2,20,000

VAT of 12.5% Rs.30,500 -

SGST of 6% - Rs.13,200

CGST of 6% - Rs.13,200

Invoice value for

Rs.2,74,500 Rs.2,46,400
manufacturer

Value to Wholesaler

Cost of goods Rs.2,74,500 Rs.2,46,400

Profit margin of 10% Rs.27,450 Rs.24,640

Total Value Rs.3,01,950 Rs.2,71,040

VAT of 12.5% Rs.37,743.75 -

SGST of 6% - Rs.16,262.40

CGST of 6% - Rs.16,262.40

54 | P a g e
Value to Manufacturer Old Tax system GST System

Invoice value to
Rs.3,39,693.75 Rs.3,03,564.80
wholesaler

Value to Retailer

Cost of goods Rs.3,39,693.75 Rs.3,03,564.80

Profit margin of 10% Rs.33,969.375 Rs.30,356.48

Total Value Rs.3,73,663.125 Rs.3,33,921.28

VAT of 12.5% Rs.46,708 -

SGST of 6% - Rs.20,035.28

CGST of 6% - Rs.20,035.28

Invoice value to retailer Rs.4,20,371.125 Rs.3,73,991.84

55 | P a g e
5.2 CONCLUSION

By implementing GST on goods and services, the Indian government is improving the economy
by removing the cascading system of tax and reorganizing the business process in India.
The cascading effect of tax has been significantly reduced with the implementation of GST. GST
has replaced indirect taxes like VAT in India. Vat implementation in India resulted in paying taxes
for every stage of product movement whereas, with GST, the consumers only have to pay for tax
on the end product. Therefore, we hope you have understood the difference between VAT and
GST through this article.

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 development
activities of the country. It is obvious that in many ways GST is an improvement over the VAT
regime. However currently there are a few products such as petrol, diesel and alcohol for human
consumption that are not included in GST. As GST evolves further, we can expect additional goods
and services to be included under GST. What’s more the rationalization of rates under GST is
expected to continue in the near future which will help improve indirect tax collection across India.

56 | P a g e
5.3 BIBLIOGRAPHY

1. Investopedia

2. Clear tax

3. Wikipedia

4. https://keydifferences.com/

5. https://khatabook.com/

57 | P a g e
Thank you

58 | P a g e
59 | P a g e