GST vs VAT - The Key Differences

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Author: Shephali Dhasmana

Date: 28 Jan 2023


What is the difference between GST and VAT?

Taxation is an essential component of any economy. They enable an administration to implement decisions that improve the living conditions of the taxpayers. In 2017 the administration implemented the Goods and Services Tax to replace all indirect taxes that both the center and the states had applied to the movement of goods and services. Under GST, the cascading effect of taxes is abolished. 

What is VAT?

VAT is an indirect tax imposed on goods and services that add value to the supply chain. The then administration implemented the tax in April 2005.  Before reaching a consumer, a product goes through different stages of production, and VAT is the tax added to each of these stages because they add value to the final product. It is a tax ultimately borne by the consumer of that specific good or service. The VAT rates vary from state to state, owing to different legislations. 

Cascading effect of taxes under VAT

The cascading effect refers to the practice of paying tax on tax, which means that a consumer eventually has to pay tax on a tax already levied. This increases the total price that a consumer has to pay for goods and services.

Disadvantages of VAT

  • Cascading effect of taxes 

  • The VAT did not allow for the claim of an input tax credit.

  • The tax rates lack uniformity 

  • The laws for VAT are not uniform either 

  • It is not possible to adjust the input of CST against the VAT

What does GST provide instead of VAT?

Goods and services tax was introduced in 2017 by the then administration under the policy of 'one nation, one tax'. It unifies the country in collecting taxes, which can be classified as a comprehensive destination-based taxation concept.

Benefits of GST 

  • It eliminates the cascading tax effect which was prevalent under VAT 

  • The procedure is straightforward owing to it being comprehensive and online 

  • The number of compliances also reduces 

  • Unlike other taxation processes, there is a defined treatment of e-commerce companies. 

 

Conclusion 

The implementation of GST has reduced the cascading effect of taxes and enabled taxpayers to have lesser compliance. It aids in improving the business process in the country. The filling method for returns and taxes has become more accessible because it has moved online. GST assists the economy's growth because it has a clear structure and a uniform code. 


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