Goods and Service Tax or, in other words, GST, fulfilled the long-lost dream of India, i.e., ‘one country, one tax’. With the arrival of GST, all other prevailing taxes in the country lost their value. Taxes like service charges, Octroi, Value-added Tax(VAT), Excise Duty etc., were taking a toll on the country’s financial health. Implementation of GST helped the country to regain its glory in complete form. Understanding the difference between GST and VAT will help you know the country’s financial status before and after the introduction of GST. But before moving ahead, let’s get a brief idea about VAT and GST.
What is VAT?
Every product goes through a series of processes like manufacturing, packaging and transportation before reaching the customer. During each production stage, they undergo necessary changes in the supply chain. There is an addition of VAT or value-added tax at each production stage. The previous customer meets the expenses of these taxes added to each step.
VAT came into existence after two scientists named Thomas S Adam and Wilhelm Von Siemens invented it at the starting of the 20th century. European countries considered VAT as an improved version of sales tax. Germany and France implemented VAT first. Later on, many other countries, including India, adopted VAT. India implemented VAT on 1st April 2005, leading to the replacement of all additional existing sales tax in the country.
Similar to GST, the idea behind introducing VAT was to unite the country under one tax rule. But the tax systems faced many setbacks because of other indirect taxes. VAT had a cascading effect on the tax system. You cannot claim Income Tax Credit(ITC) for services under VAT. Different states had different VAT rates and laws; these drawbacks led to the replacement of VAT with GST in India.
What is GST?
GST is an indirect tax implemented in the country on 1st July 2017; GST successfully replaced all other indirect taxes and improved the financial status. In GST, tax will be collecting at each retail location.
There are four types of GST prevailing in the country; SGST, or state goods and service tax, is the tax charged for goods and services inside the state. CGST, or central goods and service tax, is the tax charge for inter-state dealings. UTGST, or union territory goods and service tax, is the tax collected from union territories like Andaman and Nicobar Islands, Daman and Diu, Lakshadweep, Chandigarh and Dadar Nagar Haveli. In these places, they collect CGST also along with UTGST. IGST, or integrated goods and service tax, is the tax collected when the states exchanges their goods and services.
GST applies to a particular set of people in the community. E-commerce businesses or operators come under the GST slab. Customers who utilise the reverse charge mechanism also come under GST. GST applies to NRIs also who perform transactions. Companies with annual turnover higher than 40 lakhs also have to pay GST. The North East and other hill stations benchmark is more than ten lakhs.
Suppliers, purchasers and dealers have to register under GST compulsorily. Business organisations with an annual turnover of more than 20 lakhs must also register under GST. After registration, for individuals or business organisations receives unique registration number called Goods and Service Tax Identification Number or GSTIN. Depending upon their state and permanent account number or PAN, it will be a 15-digit code. GSTIN provides authenticity to your business and helps in easy verification. It will prevent fraud and help you get discounts by claiming the input tax credit.
How does GST replace VAT?
Customers were losing money by paying taxes for each stage of production in the VAT system. It resulted in a cascading tax effect. However, with the implementation of GST, the country witnessed significant changes in its tax system, which was beneficial for both businesses and customers.
GST implementation led to the reduction of tax evasion and tax administration corruption. It comes with lesser compliances and a higher exemption limit. GST registration is user-friendly, and anyone with minimum educational qualification can easily register under GST. Technology plays a significant role in GST, thereby increasing its credibility. After the implementation of GST, export and import businesses started gaining pace. GST simplified the entire process of E-commerce.
Difference between GST and VAT
GST has significant advantages over VAT. With GST’s single compliance system, it eradicates all the malpractices happening in the country’s tax system. It also reduced the tax burden of the citizens to a great extent. It significantly removed all the indirect taxes that were prevailing alongside VAT. GST is highly transparent, and it reduces the overall cost for businesses. Both individuals and business organisations have benefitted from GST.
GST and VAT are different from each other in several ways. In VAT, a summary-based tax, is imposed on the sale of goods, while in GST, a transaction-based tax, is imposed on every Goods and service. VAT rates vary from state to state. GST rate is the same everywhere inside the country. Under GST, there are different taxes like SGST, CGST, UTGST and IGST, classified according to state, central, union territories and interstate supplies. There is a difference in the registration policy also of GST and VAT.
Individuals or organisations with an annual turnover of more than ten lakhs must register under VAT, whereas the turnover must be more than 20 lakhs to register under GST. State authorities will be collecting VAT while central, and state governments equally share the GST policy.
GST is collected from the buyer’s state when the VAT collects itself from the seller’s state. In VAT, ITC is not available for the customs duty paid, whereas in GST, a taxpayer can claim the credit on goods and services he received, i.e. ITC is available on GST. You can pay VAT only online, whereas GST is much more liberal in allowing citizens to pay GST online and offline; moreover, if the GST amount is more than 10,000, you have to pay online only compulsorily.
In VAT, compliances for goods movement are different in each state, whereas in GST, it is identical for all states. VAT returns filing must be on the 10th, 15th and 20th of the following month, while you must file GST returns on the 20th of every month.
VAT led to much confusion in the country’s tax system, which the GST eradicated with its arrival. GST has brought financial stability to the country, helping it grow with each passing day. Still, we find people unaware of the rules and regulations of GST. It is better to take a certification course in GST and learn about the nation’s most significant tax change. Finprov Learning, India’s leading accounts education provider, is offering a GST certification course to give you in-depth knowledge of GST and its various policies. Join Finprov and become a successful GST practitioner.