Tax collection is the primary source of revenue for most governments. It enables them to spend on the development of the economy and thus 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 Centre and the states had applied to the movement of goods and services. Under GST, the cascading effect of taxes is abolished.
VAT stands for value added tax. It is an indirect, consumption based tax that is applied to goods and services at each stage of production or distribution. VAT was implemented in April 2005.
Before reaching a consumer, a product goes through different stages of production, and VAT is the tax added at each of these stages because they add value to the final product. The tax is ultimately paid by the end consumer of that specific good or service. VAT rates vary from state to state, owing to different legislations.
Cascading effect of taxes means the payment of further tax on taxes already paid. This was the scenario when VAT was being charged. The Central government charged Excise Duty on the manufacturing of goods in India. For services, they levied Service Tax. Excise Duty was charged at the time the goods were sold. Now, the State Government levied VAT on the final landed price, which included the cost of Excise Duty. Thus, it led to the payment of tax on top of tax. Since suppliers had no way to claim any credit for the taxes they have already paid, they had to factor in the taxes when determining the final price to charge end consumers. This invariably led to an increase in the final price the ultimate consumer needed to pay for goods and services.
GST has helped to eliminate this by allowing dealers to claim Input Tax Credit for the taxes already paid when buying inputs that were used to produce goods and services. Such taxes can now be offset against the tax received from the end consumer. This eliminates the cascading effect of taxes, and reduces the overall tax liability of the dealer. Dealers are hence able to pass this benefit on to consumers as well, leading to reduced prices for consumers in many cases.
Below are some of the main disadvantages of the VAT system of taxation:
GST (Goods and Services Tax) is a unified tax system that replaces multiple indirect taxes, including VAT (Value Added Tax), in India. GST provides several advantages over VAT, including simplification of the tax structure, increased efficiency, broader tax base, and improved revenue collection. The GST system is designed to be more efficient as it allows for the seamless flow of tax credits across the entire supply chain. This helps to reduce the cascading effect of taxes, where taxes are levied on taxes, and thus reduces the cost of doing business. Additionally, GST provides a more transparent tax system that reduces tax evasion and encourages compliance. Overall, GST is a more comprehensive and efficient tax system that offers several benefits for businesses and the economy.
GST has brought several benefits for businesses, consumers, and the overall economy, including the simplification of the tax system, reduction of cascading effects, and increased compliance. In this regard, we will explore the benefits of GST in detail.
Goods and Services Tax (GST) and Value Added Tax (VAT) are two different tax systems that have been adopted by various countries to levy indirect taxes on goods and services. While both taxes are similar in many ways, there are some significant differences between GST and VAT that businesses need to understand to ensure compliance and avoid any penalties. Here are some of the key differences between GST and VAT.
|Date Of Commencement||It was introduced by Government of India on 1st April 2005||It was introduced by Government of India on 1st July 2017|
|Taxation Rates And Law||Each state in India has a separate VAT rate and tax laws that fall under it.||In India, the Goods and Services Tax (GST) is levied uniformly across all states. However, there are four distinct Acts related to GST taxation laws, including the Central GST Act, State GST Act, Integrated GST Act, and Union Territory GST Act, which are applicable based on the nature of transactions.|
|Taxable Event||Is on sale of goods||Is levied on every supply of goods and services|
|Authority||The state government has complete control over the tax proceeds because it is responsible for collecting the VAT.||Every sale generates both the Federal GST and State GST, which are subsequently split between the central and state governments.|
|Mode Of Payment||Only offline payment methods are accepted for VAT.||Both online and offline payment options are available for GST.|
|Compliance||Each state has a unique compliance procedure for the transfer of commodities across states.||The compliance structure for interstate trade in goods is consistent across all states.|
|Tax Collection||State of the seller bears responsibility for tax collection.||It is the consumer state’s responsibility to collect taxes.|
|Input Tax Credit||For the materials they obtained, the taxpayer is eligible for an input tax credit.||Input Tax Credit benefits are not accessible.|
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.