How Was VAT Different From GST?

How Was VAT Different From GST?

A couple of years ago, the tax system of India underwent a significant transition, directing the country from the system of VAT to the system to GST. While the differences between the two might not seem major or many in number, their differences have created a lot of change in the taxation system of the country. Both systems required/require registration, and a GST check is required for verification in the current system.

How Was VAT Different From GST?

To understand the differences between the two better, we must first understand each of the terms and systems in isolation and then compare the two.

Let's first start with the replaced system of VAT and understand how taxation worked before GST was implemented in 2017. Read here on more about vat and gst meaning.

Value Added Tax (VAT)

Through the ValueAdded Tax Act of 2005, the system of VAT replaced Sales Tax system. VAT, in short, is an indirect tax which is consumption-based, that is, the ultimate tax is borne by the consumer. 

The trader or the businessman had to pay taxes on his/her purchases, but the tax to be paid was deducted from the tax received by the trader on his/her sales.

VAT, while it was adopted by most states of the country, was not a national or a universal tax system for India. Each state had its own set of legislation that guided VAT rates, and the products that were subject to those rates.

VAT also was plagued by the system of dual taxation, where a company or a business did not have a unified tax payment system and had to pay taxes on individual goods and services.

Goods and Services Tax (GST)

The GST essentially replaced the system of VAT in July and was hailed as the most significant tax reform of the country since independence.

  

GST, too, is consumption-based and an indirect tax, where the end consumer is liable to pay the tax on a product or a service.

However, GST is more of a uniform tax system, where the center controls tax rates and sees whether a product or a service is taxable or not.

GST also removes the bane of dual taxation, making sure that a company has to pay only one tax for its purchases, sales, and services.

The Differences

Now that we have established the definitions and functions of the two types of taxes, we can get into the differences see and what made GST such a different system from VAT.

1. Levy of Excise Duty:

In the system of VAT, excise duty was levied at the moment of manufacture of a product, whereas, in GST, excise duty is not collected.

2. Collection of Input Credit:

Both systems have provisions that allow the trader to deduct the taxes he paid from the taxes collected by him on sale, making sure that the trader is remunerated. However, in VAT, the trader was not reimbursed in the case of inter-state trading. In the GST regime, the trader can file for remuneration even on inter-state sales.

3. How the payment is made:

under the VAT regime, taxes had to be paid in person to allotted government offices. This created a lot of hassles, even giving way to corruption. Traders had to be present to file taxes physically, and such a process took a lot of time. Under the system of GST, all the taxes have to be filed online, making sure that paying taxes is easy for business people, and corruption and evasion are kept under check.

4. Subdivision of taxes:

VAT was not a uniform tax. Even when it was levied on a good or a service, other taxes could also be levied on the same product, making the system of tax extremely complicated to understand. The GST does away with these complications and acts as a uniform tax. When GST is levied on a good or a service, no other tax is supposed to be levied.

5. Taxable Ceiling:

The taxable ceiling under VAT was 10 lakhs, that is, companies having a turnover of 10 lakhs had to register to pay VAT. Whereas, the ceiling for GST is 20 lakhs, giving more incentive to small businesses for them to grow without being buried under several taxes.

6. End revenue:

Before GST, under VAT, the seller state was entitled to get the taxes collected on goods and services. Whereas, under GST, the consumer state is to get the taxes collected on the product or the service.

7. Division:

Since VAT was not a uniform tax, it had several rates charged by different states on the discretion of the state itself. The GST is divided into three types: Union GST, State GST (Union Territory GST for Union territories), and Integrated GST (for inter-state trading). All rates are fixed by the center, making for uniformity even in the division.

It can be seen why people would get confused between VAT and GST, and think that they are one and the same, but on closer inspection, we see that the GST and VAT differ in several ways and why GST is seen as major tax reform.