GST and VAT are both counter approach taxation systems by the government to charge taxes on goods and services across the nation. The old tax system, i.e. value added tax, was the method of applying taxes on goods while the goods and services tax is set to change this course of action towards consumers.
VAT or Value Added Tax was one of the indirect taxes which has been subsumed by GST. Although the concept of VAT was introduced in 2005, it was implemented in 2014 and applied to the sale of goods. Similarly, service tax applied to services.
Here are a few disadvantages of VAT
[ Read: What is GST ]
VAT is applicable only on the sale of goods while GST is applicable both on goods and services.
A key difference between VAT and GST is that the taxable event in case of VAT is the sale of goods. However, in case of GST it is the supply of goods or services.
VAT laws and tax rates were different in each state and each of them kept the whole share of collected tax with themselves. However, under the GST regime, both SGST and CGST is collected from the supply of goods and services and later bifurcated by the central and state governments.
[ Read: Types of GST ]
In case of the VAT, the dealer has the right to deposit his net tax liability by deducting input VAT on goods purchased from output VAT on goods sold. However, as GST applies to goods as well as services provided, the GST portal system calculates the input credit which is used for payment of the next GST liability.
The credit of input tax cannot be claimed for services in case of VAT as it is applicable only to goods. But, input tax credit can be claimed for both goods as well as services in case of GST as it applies to both.
[ Read: Input Tax Credit under GST ]
VAT used to have a declaration system (i.e. issuance of various forms for a particular pool of transactions) for interstate sales (Form C), Branch Transfer (Form F), Deemed Exports (Form H), SEZ sales (Form I), etc. Hence the VAT system was a bit complicated and paperwork driven.
This concept of Declaration has been done away with under the GST regime.
Under VAT, the taxpayer was informed about the mismatches only at the time of assessment of that particular tax period which was resulting in the cash outflow for such mismatches or the follow-up with such vendors after almost 2-3 years after the transaction took place. This used to have very serious repercussions on the taxpayers, particularly if the amount was huge. This was in substance resulting in the irreversible credit loss to the taxpayer.
Under GST, automated monthly reconciliation of transactions has been introduced which will make the taxpayers identify the differences immediately and take follow up and rectify the mismatches at that point itself. This will substantially reduce the credit loss.
VAT is not applicable to provided or sold services. Service tax was charged additionally @ 15%. GST rates for services depend on nature of service. It may be 12% and 18% and 28% depending on the sector. Most services come under 18% GST.
Under the VAT regime, the due date to file a return was 20th of succeeding month.
Under the GST regime, the due date to file a return for sales is 10th, the purchase is 15th, and payment is 20th of succeeding month. Those applying for composition scheme have to file a return only once every quarter.
[ Read: Returns under GST ]
Obtaining registration under VAT was mandatory for businesses exceeding an annual turnover of Rs 5 lakh (5 lakh was for Maharashtra VAT, it differed from state to state). Registration under GST is mandatory for businesses exceeding an annual turnover of Rs 20 lakh.
Under VAT, excise charged used to become a cost for the dealer as the credit of the same was not available, which lead to double taxation. But under GST, there is a seamless flow of credit.
Online payment was not a compulsory thing under VAT, but GST makes it mandatory if the tax, penalty or interest etc. payable exceeds Rs 10,000.
While GST is a fully online technologically advanced tax regime, it was not the case under VAT. Many of the functions were not automated under the VAT which was compelling the taxpayers to do a lot of paperwork.
|Point of Difference||VAT||GST|
|Applicability||Goods||Both goods and services|
|Taxable event||Sale of goods||Supply of goods and services|
|Tax b/w state and central govt.||The whole share of tax collected goes to the state which collects it||Collected tax is bifurcated b/w state and central govt.|
|Calculation of input credit||Net tax liability = VAT on output – VAT on input||Net tax liability = GST on output – GST on input|
|Input tax credit||Cannot be claimed for services||Can be claimed for both goods as well as services|
|Tax on services||Not applicable||Applicable|
|Return filing||20th of succeeding month||10th, 15th and 20th of succeeding month|
|Registration||Mandatory if turnover exceeds Rs 5 lakh (varies from state to state)||Mandatory if turnover exceeds Rs 20 lakh|
|Mode of payment of tax||Offline||Online if the amount exceeds Rs 10,000|
|Tax distribution between state and centre||Under VAT the revenue was collected by the seller state||Under GST the revenue is collected by consumer state|
|Flow of credit||Excise duty paid was not available to be claimed as credit||Seamless flow of credit|
The consultant charged 15% service tax on services of Rs 70,000. So, his output tax was Rs 70,000 x 15% = Rs 10,500.
Then, if he purchased office supplies for Rs. 25,000 paying 5% as VAT : Rs 25,000 x 5% = Rs 1,250.
He had to pay Rs 10,500 output service tax without getting any deduction of Rs 1,250 VAT already paid on stationery.
His total tax outflow is Rs 11,750.
GST on service of Rs 70,000 @18% = Rs 12,600
Subtract GST on office supplies (Rs 25,000*5%) = Rs 1,250
Net GST to pay = Rs 11,350
Before the implementation of GST, if a machine manufacturer had to sell a machine, he had to pay Excise duty and VAT on it. So if the price of machine sold was Rs 5,000 then the Excise duty @ 12.5% was Rs 625 which would bring the value to Rs 5,625. VAT of Rs 816 i.e. @ 14.5% would be charged on this value. So, the customer has to pay Rs 6,441.
Now let’s see how the same manufacturer sells his product in the GST regime.
In the GST regime, only GST is charged on the price of machinery. So, the seller charges CGST @ 9% and SGST @ 9% on the value of machinery which is Rs 5,000. So, the buyer in this case pays Rs 5,000 + Rs 450 (CGST) + Rs 450 (SGST) i.e., Rs 5,900 to buy the machine.
As you can assess from both the scenarios, the cascading effect of tax has vanished and the total tax payable is less under GST regime.
Hence, we can deduce from these points that there are a number of differences between GST and VAT. GST is a probable solution for the different issues taxpayers faced under the VAT regime.
At H&R Block India we have tax experts who will not only help you be GST compliant but also prepare and file your GST returns.