Comparing Goods and Services Tax (GST) with Value Added Tax (VAT)

The Goods and Services Tax (GST) took effect on July 1, 2017, replacing various Central and State indirect taxes like VAT, excise duty, and service tax. This article explores the distinctions between VAT and GST and their economic impact, particularly how GST has removed the problem of cascading taxes.

Understanding the Cascading Tax Effect

Tax cascading occurs when tax is applied at each stage of a product's sale, with the tax base including previously paid taxes. This results in consumers paying tax on an amount that already incorporates prior taxes. Next, we will examine the Value Added Tax (VAT) and its influence on India's economy.

What is Value Added Tax (VAT)?

VAT, an indirect consumption tax, was introduced in the Indian tax system on April 1, 2005. It is imposed on a commodity's value addition at each stage of the supply chain, from manufacturing to final sale. The consumer's VAT liability is determined by the product's cost, less any taxable expenses incurred earlier in its production. VAT replaced Sales Tax with the aim of creating a unified Indian market. However, its implementation was state-specific. By June 2, 2014, VAT was active across all Indian states and union territories, excluding Andaman and Nicobar and Lakshadweep Islands. Central Sales Tax (CST) was applied to interstate transactions, collected by the Central Government but retained by the respective state.

Drawbacks of Value Added Tax (VAT)

The VAT system presented several limitations:

• It contributed to the cascading of taxes.
• Input Tax Credit (ITC) was not available for service tax paid under VAT.
• India faced varying VAT rates across different states.
• Each Indian state had its own distinct VAT laws.
• Central Sales Tax (CST) input could not be offset against VAT, and vice versa.

How GST Surpassed VAT

The Goods and Services Tax (GST) introduced a revolutionary, unified, and destination-based tax system, standardizing tax collection nationwide. It transformed India's taxation framework by completely eradicating the issue of tax on tax.

Advantages of Implementing GST

The introduction of GST offered numerous benefits:

• It successfully eliminated the cascading tax effect.
• Registration, return filing, and refund processes became simpler through online platforms.
• The overall number of compliance requirements was reduced.
• Clear guidelines were established for e-commerce businesses.
• Small taxpayers benefited from streamlined procedures and simplified return forms.
• Logistical operations saw improved efficiency.
• India adopted a single, unified indirect tax law.
• Indirect tax rates became consistent nationwide.

Illustrative Example: Consultant Services

Let's consider a consultant offering services to clients. Under the VAT System: A consultant charging 15% service tax on Rs. 70,000 in services would incur an output tax of Rs. 10,500. If the consultant bought office supplies for Rs. 25,000 with a 5% VAT, this would be Rs. 1,250. Crucially, the Rs. 1,250 VAT paid on supplies could not be deducted from the Rs. 10,500 output service tax. This resulted in a total tax payment of Rs. 11,750. Under the GST System: For the same Rs. 70,000 service, GST at 18% would be Rs. 12,600. However, the GST paid on office supplies (Rs. 25,000 x 5% = Rs. 1,250) can be deducted. This reduces the net GST liability to Rs. 11,350.

Summary

In conclusion, the implementation of Goods and Services Tax has significantly improved the economy by eradicating the cascading tax effect and streamlining business operations throughout India.

Further GST Information

Explore more details about GST:

• Complete guide to GST
• Popular E-Learning courses on GST:
• GST Course 2020
• GST Course 2017