Taxation is a complicated subject. Taxes are categorized into direct taxes and indirect taxes. Direct Tax is the tax that people directly pay to the government, for example, income tax. Indirect Tax is something which the people indirectly pay to the government through the medium of manufacturers and distributors, for example, VAT, CST.
There are multiple types of taxes on the indirect tax domain, However, VAT and CST form the main taxes which most people will be familiar with. Many people may even think that VAT and CST are the same. However, there is a spring difference between these two terms.
VAT vs CST
The difference between VAT and CST is that VAT is a type of indirect tax that is imposed at multiple phases of production or distribution, while CST is an indirect tax that is imposed on sales conducted between states i.e. interstate sales.
However, the above is not the only difference. A comparison between both the terms on certain parameters can shed light on subtle aspects:
Comparison Table Between VAT and CST (in Tabular Form)
| Parameter of Comparison | VAT | CST |
|---|---|---|
| Full-Form | Value Added Tax | Central Sales Tax |
| Stage of Production | Levied at each stage of production or distribution | CST is not levied on any stages in production or distribution. It is levied on the final sale. |
| Concessions | Less concessions are available under VAT. There may be certain goods on which no VAT may be applicable. | There are concessions and exemptions available both general and specific |
| Nature of Tax | Multiple-points tax as the tax is levied on multiple stages of production or distribution | One-point tax as it is only levied on final sales |
| Applicable Law | Value Added Tax Act, 2005 and associated rules and procedures established under the same govern the VAT system in India | The Central Sales Tax Act 1956 and associated rules and procedures established under the same govern the CST system in India |
| Input Tax Credit | There is a facility of Input Tax credit on VAT | There is no facility of Input Tax credit on CST |
| Complexity | VAT is a complex tax as levied on multiple stages and with different rates | Less complex because it is only levied on final sale |
| Scope for Double Taxation | Not possible | Possible |
| Scope for tax evasion | Less chances | More chances |
| Prevalence | Applicability since recent times | Applicable since many decades |
| Replacement | VAT has replaced CST in recent times | CST has been replaced with VAT |
What is VAT?
VAT means Value-Added Tax. VAT is a type of indirect tax or consumption tax. VAT is called an indirect tax because it is indirectly paid by the end customer when they are procuring the goods or services from manufacturers or retailers. VAT is levied at various phases of production or distribution. VAT is called a Value Added tax because it is a tax that is levied on the value being added to the goods or services at each stage in production or distribution.
VAT rates are different for different goods and services. Again, the rates may differ from one State to another. VAT applies to all the goods and services whether they are developed in India or sourced from outside.
VAT registration is compulsory depending on the threshold load and other factors. Non-registration under VAT is an offense under the law and certain fines or sanctions can be imposed by the governmental authorities.
The Value Added Tax Act (2005) and associated VAT rules in India specify the applicable rates. VAT is payable to the government on specified dates (usually monthly) as per the rules in force and certain returns may also need to be filed.
VAT calculation can be done by various methods but VAT is a very complex area and the VAT phenomenon is quite new from the Indian perspective. Also, many rules and regulations are still interpreted at different levels of administration to provide better guidance to the dealers and consumers.
What is CST?
CST means Central Sales Tax. CST is an indirect tax. CST is a type of tax being levied on interstate sales. Although CST is applicable on interstate sales, the State Government has the power to levy CST on sales conducted within the State as well.
CST applies to all goods and services whether they are developed in India or procured from outside. CST collected is payable on due dates (usually monthly) and certain returns need to be filed. However, CST comes with many exemptions and concessions and hence many goods may be exempt from the applicability of CST.
CST has been in prevalence in India for a long time. However, CST is fraught with multiple problems such as cascading effect (double taxation), and the possibility of tax evasion.
The Central Sales Tax 1956 and related rules in India specify the applicable provisions for CST. Many states may also have their own sales tax laws. However, in recent times many states have switched to VAT considering the various disadvantages such as double tax, evasion effects of CST. This being the case, it can be considered that CST is being replaced with VAT.
Main Differences Between VAT and CST
- VAT means Value Added Tax. CST means Central Sales Tax.
- VAT is levied on each stage of production or distribution. CST is not levied on each stage of production or distribution.
- VAT is levied on sales conducted within a State. CST may or may not be imposed on any sales done within a state.
- VAT is dealt with under the VAT Act 2005 in India. CST is dealt under the Central Sales Act 1956 in India.
- VAT has the mechanism of Input Tax credit. CST does not have any methods of Input Tax Credit.
- VAT does not or has less chances of tax evasion or double taxation. CST is fraught with problems on tax evasion and double taxation.
Conclusion
Tax compliance (especially as it relates to indirect tax) is a critical concern area for any business. The law mandates certain filing of returns and depositing tax with the government and indirect taxes are fraught with complex rules and regulations. To add to this, there is the plethora of multiple sub-rules and procedures laid down by each state government.
In recent times, many states in India have replaced CST with VAT to overcome the negative effects of double taxation and tax evasion being caused by CST. Businesses are mandated to follow the VAT and CST regulations with care and ensure compliance with the governmental orders. Also, VAT is a new law in India.
Therefore, considering these complexities, it is highly advisable to gain expert advice from tax or accountancy professionals to ensure that businesses stay compliant with the governmental mandates at all times.
