The implementation of the GST, or Goods and Services Tax, signaled a significant overhaul of India's indirect taxation system. The primary goals of the GST implementation have been to establish a uniform tax rate (for each product/service) across the country and to increase the amount of indirect taxes collected. Although the relatively new GST has largely replaced existing state-level taxes, one tax that remains applicable to certain key products/services is VAT, or value added tax.
We will discuss the distinction between GST and VAT in the following sections.
The Fundamentals of Value Added Taxation
VAT is the abbreviation for Value Added Tax. It is a state-level tax that is levied on certain essential products such as gasoline, diesel, and alcoholic beverages for human consumption that are not subject to the GST Act. In fact, VAT was introduced in 2005 to replace the previous Sales Tax, allowing for a unified tax rate on goods and services across India. However, the VAT returns had a few disadvantages. The primary reasons for implementing GST as a substitute for VAT were as follows:
Due to the fact that VAT is a state-level tax, the applicable rate for the same product/service tended to vary by state.
Differences in VAT rules and regulations between states increased businesses' compliance burden.
Tax cascading effect, in which the end user bears the cost of a single good/service that has been taxed multiple times, increasing the end user's price.
Small business accountants who paid customs duty on raw materials/inputs were not able to offset these costs through an Input Tax Credit (ITC) or similar mechanism.
The Fundamentals of the Goods and Services Tax
GST is an abbreviation for Goods and Services Tax. This tax was created to address critical issues identified following the implementation of the VAT regime. In that regard, some key features of GST include the following:
Introduction of a uniform tax rate for a specific good/service
Reducing compliance costs by establishing a unified set of GST rules
Eliminating the cascading effect of taxation, such that a product/service is subject to GST only once
Input tax credit (ITC) mechanism established to assist businesses in offsetting GST costs on a variety of inputs/raw materials
These distinguishing characteristics serve as the basis for the distinction between GST and VAT. A Cheap tax return accountant advises businesses on their general VAT obligations, as well as the VAT implications of specific transactions.
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