Difference Between GST and VAT
Explore the difference between GST and VAT in this comprehensive guide. Learn how these two consumption taxes differ in their application, calculation methods, and impact on businesses and consumers.
Both GST and VAT are consumption taxes. The main difference between GST and VAT is that GST is a comprehensive tax on goods and services, while VAT is applied only to the value added at each production stage. The GST has replaced the Central and State indirect taxes such as VAT, excise duty and service tax. It was implemented on 1st July 2017.
Explore finance courses
Difference Between GST and VAT
| Basis of Comparison | GST | VAT |
| Tax Scope | Applies to both goods and services. | Applies to goods only. |
| Taxable Base | Taxes value of goods and services at each stage. | Taxes are the value added by businesses at each stage. |
| Stages | Covers all stages from production to consumption. | Applied at different stages of production. |
| Input Tax Credit | Allows credit for taxes paid on inputs. | Allows credit for taxes paid on previous stages. |
| Administration | Both centrally and by states. | Generally administered by state governments. |
| Uniformity | Focuses on a uniform tax rate across the country. | Rates may vary across different products and states. |
| Cascading Effect | Aims to reduce the cascading effect of taxes. | May suffer from the cascading effect on certain products. |
| Tax Calculation Method | Follows a multi-tier tax structure with different rates. | Uses a single rate for most goods. |
| Applicability Threshold | It may have a threshold for small businesses. | Usually no threshold. All businesses pay VAT based on sales. |
| Implementation | Implemented in multiple countries with varying models. | Implemented differently across countries depending on laws. |
Best-suited Tax Law courses for you
Learn Tax Law with these high-rated online courses
VAT vs GST Calculation
To understand the difference between VAT and GST calculations using real-world examples, let’s consider a scenario where a product goes through various production and distribution stages before reaching the end consumer.
We’ll calculate VAT and GST for each stage to illustrate the key distinctions between the two tax systems. For simplicity, we’ll assume that the VAT rate is 15% and the GST rate is 18% in this example.
| Stages | VAT Calculation | GST Calculation |
| 1. Manufacturer to Wholesaler | Product Cost: Rs.1000 Output VAT = 1000 * 15/100 = Rs. 150 Input VAT = 0 (assuming the manufacturer didn’t purchase any goods or services) Net VAT payable = 150 – 0 = Rs. 150 |
Product Cost: Rs.1000 Output GST = 1000 * 18/100 = Rs. 180 Input GST = 0 (assuming the manufacturer didn’t purchase any goods or services) Net GST payable = 180 – 0 = Rs. 180 |
2. Wholesaler to Retailer |
Product Cost: Rs.1200 Output VAT = 1200 x 15/100 = Rs. 180 Input VAT = Rs. 150 (the VAT paid to the manufacturer) Net VAT payable = 180 – 150 = Rs. 30 |
Product Cost: Rs.1200 Output GST = 1200 x 18/100 = Rs. 216 Input GST = Rs. 180 (the GST paid to the manufacturer) Net GST payable = 216 – 180 = Rs. 36 |
| 3. Retailer to End Consumer | Product Cost: Rs.1500 Output VAT = 1500 x 15/100 = Rs. 225 Input VAT = Rs. 180 ( VAT paid to the wholesaler) + Rs. 30 ( VAT paid to the manufacturer) Net VAT payable = 225 – 210 = Rs. 15 |
Product Cost: Rs.1500 Output GST = 1500 x 18/100 = Rs. 270Input GST = Rs. 216 ( GST paid to the wholesaler) + Rs. 36 ( GST paid to the manufacturer) Net GST payable = 270 – 252 = Rs. 18 |
Summary of GST vs VAT Calculations (in Rupees)
VAT Calculation:
- At each stage, VAT is applied to the product’s full value.
- Businesses cannot claim Input Tax Credits, so taxes accumulate at each stage.
GST Calculation:
- GST is also applied to the product’s full value at each stage.
- Businesses can claim Input Tax Credits for the GST they paid on purchases.
- Input Tax Credit eliminates the tax liability for businesses, resulting in no additional tax burden.
What is VAT?
Value-added tax or VAT is applied to the incremental value of goods and services added in every production or distribution cycle stage.
The VAT system first identifies the amount of value addition and then levies a tax on it.
Please note that it applies to interstate purchases and sales only. VAT has enabled traders, businessmen, and the government to sell goods and services at the minutest level. It also helps to promote transparency in the services.
The VAT system was introduced in India on April 1, 2005. It replaced the existing sales tax system and aimed to streamline taxation. VAT also helped to reduce cascading effects by allowing businesses to claim input tax credits for taxes paid on their purchases.
The introduction of VAT marked a significant change in India’s indirect taxation system. It proved to be a crucial step towards implementing the GST later.
Variants of VAT
There are three main variants of VAT –
Gross Product Variant – In Gross Product Variant or Gross Output VAT, tax is levied at each stage of production and distribution on the gross output of goods and services. It focuses on taxing the total value of goods and services produced without allowing deductions for the cost of inputs. This means businesses cannot claim input tax credits for taxes paid on their purchases. The Gross Product Variant is not a very popular method since it can lead to a higher tax burden on businesses.
Income Variant – The income variant taxes the value-added portion of income rather than focusing on the final consumption of goods and services. In this approach, businesses are taxed on their net income. It allows businesses to deduct their expenses, including taxes paid on inputs, from their gross income before calculating the VAT liability.
Consumption Variant – Consumption Variant or Credit-Invoice VAT is the most popular method of implementing VAT. It involves taxing the value added at each production and distribution stage. It allows businesses to claim credit for the VAT they have paid on their purchases.
The VAT System in India
Here’s how the VAT system works in India:
- Manufacturers/Producers: Manufacturers and producers of goods pay VAT on their raw materials and inputs purchases. They add the VAT amount to the cost of the goods they sell.
- Wholesalers/Distributors: Wholesalers and distributors purchase goods from manufacturers and pay VAT. They then sell the goods to retailers. The cost includes VAT in the selling price.
- Retailers: Retailers buy goods from wholesalers and charge VAT on the selling price to customers. This VAT amount is the final tax paid by the end consumer.
At every production stage, businesses are entitled to claim a credit for the VAT they have paid on their purchases (input tax credit). This ensures that the VAT paid at earlier stages is adjusted against the VAT collected at later stages, reducing the cascading effect of taxation.
Ultimately, the end consumer bears the VAT expenses, included in the final selling price of the goods or services he purchases.
VAT Guiding Authority
Each state has its VAT laws guided by an Empowered Committee, working under the Ministry of Finance for proper implementation and levying. This is needed to maintain a uniform structure in the country.
Who Pays VAT?
VAT is categorized as an indirect tax. End consumer bears this type of tax, whose liability can be easily transferred along the cycle, reducing the tax burden.
Importance of VAT
The VAT system was introduced to eliminate double taxation and the cascading effect from India’s applicable Sales Tax structure. It was also required to boost compliance, apply uniformity, and make India a desirable place for global trade.
What is GST?
GST, or Goods and Services Tax, is a unified tax system replacing multiple indirect taxes levied by the Central and State Governments. Under GST, the Central and State Governments levy and collect taxes on goods and services.
The GST system follows a dual structure, comprising Central GST (CGST) and State GST (SGST), levied concurrently by the Central and State governments. An Integrated GST (IGST) is also levied on interstate supplies and imports, collected by the Central Government but apportioned to the destination state.
After negotiations between the Central and State Governments, the Constitution (122nd Amendment) Bill, 2014 was introduced in the Parliament. The Lok Sabha passed the Constitution Amendment Bill in May 2015.
To learn more about GST in detail, read our blog – GST Full Form: Understanding The Tax Regime
Conclusion
GST and VAT are similar consumption taxes imposed on purchasing goods and services. However, there are some key differences between the two taxes. GST is a destination-based tax, while VAT is an origin-based tax. GST is paid to the country’s government where the goods or services are consumed, while VAT is paid to the country’s government where the goods or services are produced.
The introduction of GST in India has had several positive effects on the economy. It has simplified the tax structure, reduced tax cascading, and increased tax compliance. We hope this article helped you understand both concepts and the difference between VAT and GST.
FAQs
How does the tax calculation differ between GST and VAT?
GST allows businesses to claim an input tax credit for taxes paid on purchases, offsetting the tax liability, resulting in a tax on value addition. VAT is calculated on the entire product value at each stage, leading to cumulative taxes without offsetting provisions.
How does the scope of GST and VAT differ?
GST covers goods and services comprehensively, while VAT primarily applies to goods, with services often taxed separately.
What impact do GST and VAT have on the final consumer's cost?
In both systems, the final consumer bears the tax burden, but GST tends to be more transparent and efficient, resulting in potential cost savings due to reduced cascading effects.
Is VAT still in use in countries that have adopted GST?
Countries that transitioned to GST have often replaced their previous VAT systems with the more comprehensive and efficient GST.
How does GST simplify tax compliance compared to VAT?
GST's uniform tax structure, input tax credit, and centralized administration reduce business complexities, making tax compliance more straightforward than traditional VAT systems.
Does GST reduce the cascading effect of taxation present in VAT?
GST's input tax credit mechanism reduces tax cascading by allowing businesses to claim credit for taxes paid on inputs, resulting in a more efficient tax system.
Which countries have adopted GST, and what benefits have they seen compared to VAT-based systems?
Countries like India, Malaysia, Canada, and Australia have implemented GST and experienced benefits like streamlined tax administration, increased tax compliance, and a more business-friendly environment than traditional VAT systems.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
Top Picks & New Arrivals
