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Value Added Tax Vs. Goods and Services Tax

Article submitted by Yazhini SASTRA Deemed to be University


India has had an indirect taxing system for years. As the economy started to grow, the application of taxes on goods and services increased. The indirect taxes are those consumption taxes levied on the product based on the value. These are the taxes that are paid for the commodity and service by the consumer to the government as a part of market price even before it is reached, thus, it is called indirect taxes. The Value Added Tax (VAT) and Goods and Services Tax (GST) are indirect taxes. The introduction of the Goods and Services Act in India has created an overhaul. The GST and VAT are similar in many aspects, but the introduction of GST is to eliminate certain shortcomings of the VAT. Thus, the differences between GST and VAT are prominent.

Overview of GST:

The implementation of GST was on the 1st of July, 2017. The purpose of its introduction is to replace central and state indirect taxes like Value Added Tax, Excise Duty, and Service Tax. The motive of GST is the enactment of a single unified tax system throughout the country. The ideology of GST is `one nation, one tax`. The design is to create a single, comprehensive, and inclusive based tax system.

· Advantages of GST:

· The important benefit of GST is its nature to eliminate the cascading effect that VAT had been imposing on the consumers. It promotes the totally added tax instead of the application of taxes on each stage. This conclusive tax method endorses transparency.

· The procedural aspect of payment of tax was made easier through this Act. Stages and procedures are simple and less intricate.

· The tax arena faced a lot of grievances regarding its non - payer’s friendly setup. Through the introduction of GST, the complaints were reduced due to its mechanism.

Outline of VAT:

It is an indirect Value Added Tax, which was introduced on the 1st of April, 2005. The implementation of VAT was on the 2nd June, 2014 on all states and union territories except for the Andaman and Nicobar Islands. The mechanism of VAT is the addition of tax in the product in each stage of the supply chain based on the value of the product. This is the concept of adding a tax on another tax. The Value Added Tax levy charges only on the commodities and not on services. The service tax was available separately. In this notion, the collection of tax was not done directly from the consumers by the government, the businesses collect the tax themselves before repaying the government.

· Disadvantages of VAT:

· Lacking stability in the rates on each state. Different states in India had different tax rates imposed on the products based on the intra-state policy.

· Rules and VAT laws were not uniformly distributed throughout the country. State and central laws had differences.

· The biggest issue VAT had was the cascading effect induced on the commodities. It is a system that applies taxes on each stage of the supply chain from raw material to a processed good i.e., till the last stage of the sale. So, the buyer in each stage pays tax based on its value including the already charged taxes.

Difference between GST and VAT:

In the subjects concerning GST and VAT, the term “business” includes any commotion taking place for either profit or non-profit, either involving or intended to involve a sale or service. Since the introduction of GST is to eliminate the key issues related to VAT, there are differences in terms of objective notions.

Inter and intrastate taxation:

· VAT is not a unified concept. These taxes vary from state to state and there is no uniformity among the state and central tax collection methods. The tax collected within the state is called the Value Added Tax, and taxes collected when the product crosses the state border is the Central Sales Tax (CST) which is imposed by the central government. As there are different laws for each state, along with the VAT and CST, the businesses have to pay the local state tax. Also, when the products are transported from one state to another, he or she has to abide by the rules of each crossing state and should have to stop at every state checkpoints. This delays the delivery and it makes the process complicated.

· In the Goods and Services Act, all the interstate transactions were subjected to Integrated Goods and Services Tax (IGST). Because of this, the time taken for delivery is reduced and the process became easier with improved quality.

Distribution of Tax Revenue:

· In VAT, as mentioned earlier, the taxes vary from state to state due to which the revenue collection between the central and state government was not uniform.

· To eliminate that problem, GST introduced two different components to separate the revenue collected. The Central Goods and Services Tax (CGST) and State Goods and Services Act (SGST). The revenue collected by the state and central government will be collected, accounted equally and separately.

Taxation of goods and services:

· VAT only imposes a tax on the goods sold which are collected by the state and not for services provided as there is a separate tax called the Service Tax for that matter, which is collected by the central government.

· Through GST, even tax on both goods and services throughout India is applied.

Claiming of tax credit:

During the payment of tax on sales, the tax which has already been paid on purchases can be reduced. This process is known as the Input Credit.

· In the Value Added Tax, claiming input tax credit is difficult. Because, for example, the goods are purchased in Gujarat and are stored in a shop in Tamil Nadu, and it is sold to a customer in that state. Claiming Input Tax Credit is difficult because there is no uniformity between the tax imposed in Tamil Nadu and that in Gujarat, and the payment shall vary and have to be made twice in those two states.

· In GST, due to its uniformity, the claiming of Input Tax Credit is possible and easy.


To sum up, there has been a clear idea through the key concepts that GST is better than VAT. By eliminating the cascading system, the Indian government has helped the businesses in India to stream better. Previously, the tax system was a heavy burden for the consumers. Thus, GST is a gamechanger in the Indian Taxation System.



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