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What is the Difference Between GST and VAT?

The Goods and Services Tax (GST) implemented on July 1 2017 has successfully subsumed all the Central and State indirect taxes, for example, service tax, central excise, VAT, and so forth.

In this article, we will see the difference between GST and VAT:

GST has abolished the cascading impact of the economy. Let us get a more profound comprehension of the cascading effect.

What is the cascading effect?

The cascading effect is when tax is collected on tax on every progression of the sale. Under the VAT system, the tax is charged on a value which incorporates tax paid by the past purchaser, along these lines, making the end shopper pay “tax on tax.”

What is Value Added Tax (VAT)?

Value Added Tax (VAT) was introduced in the India indirect taxation system on April 1 2005 to replace the concept of sales tax.

VAT was introduced to make India a solitary integrated market. On June 2, 2014, VAT was executed in all states and Union Territories (UTs) of India, apart from Andaman and Nicobar Islands, and Lakshadweep Islands.

Disadvantages of Valued Added Tax (VAT)

Here are a couple of disadvantages of Valued Added Tax (VAT):

(i) Cascading effect

(ii) It was impractical to avail Input Tax Credit (ITC) on services under VAT

(iii) Distinctive VAT rates in various states

(iv) Distinctive VAT laws in each state

What does GST acquire that VAT proved unable?

Intended to be a single, consumption-based tax and destination-based tax idea will create a single market single tax concept. GST has revolutionized the Indian indirect taxation framework.

The Goods and Services Tax (GST) plans to additionally dispose of the idea of cascading i.e., “tax on tax”.

Advantages of Goods and Services Tax (GST)

Here is the list of advantages of Goods and Services Tax (GST)

(i) Expulsion of cascading effect

(ii) Straightforward online process

(iii) Lesser compliance

(iv) Proper treatment for e-Commerce companies

Understanding the difference between GST and VAT

Let us take an example to understand the working of the GST model:

Consider an adviser offering different types of assistance to his customers.

(i) Under the VAT system

The adviser charged a 15% professional tax on services rendered of 1,00,000 INR.

Thus, his output taxable liability will be Rs 1,00,000 x 15% = 15,000 INR.

At that point, in the event that he bought office supplies for 25,000 INR paying 5% as VAT. That will amount to 1,250 INR (25,000 x 5%).

In this case, he needs to pay the whole amount 16,250 INR (15,000 INR + 1,250 INR) as he cannot deduct the tax paid on supplies from the output tax liability on services rendered under the VAT system.

(ii) Under GST Regime

The adviser charged 18% of professional tax on services rendered of 1,00,000 INR.

Thus, his output taxable liability will be Rs 1,00,000 x 18% = 18,000 INR.

At that point, in the event that he bought office supplies for 25,000 INR paying 5% as GST. That will amount to 1,250 INR (25,000 x 5%).

In this case, he just needs to pay 16,750 INR (18,000 INR – 1,250 INR) as under GST he can deduct the tax paid on supplies from the output tax liability on services rendered.

The Bottom Line

By implementing GST on goods and services, the Indian government is taking a gander at improving the economy by wiping out the cascading effect of tax and smoothing out the business procedure in India.