Difference Between VAT and GST (With Table)

VAT vs GST

The key difference between VAT and GST lies in the fact that VAT is short for Value Added Tax, while GST stands for Goods and Services Tax.

A VAT is calculated at all stages of production and distribution of goods while GST is calculated at manufacturing, sales, or on the consumption of goods and services.

A VAT is applied to sales of goods, whereas GST is applied to the supply of goods and services.

Tax is a necessary form of charge that is imposed on the taxpayer by the government to gain funds to carry out their activities.

However, in some instances, there has been double taxation and Goods and services tax was introduced to eliminate the issue.

VAT and GST can be misunderstood since they are imposed on the value of the supply of goods or sale. However, there are many differences between VAT and GST.

The following are the definitions of VAT and GST.

VAT is an indirect tax imposed at each level of manufacturing and distribution of goods on the incremental value. The VAT applies to only products sold and not services.

VAT Workflow
VAT Workflow
 

Goods and Services Tax

GST is tax applicable to both goods and services. It is a single tax that is imposed on the supply of goods and services that is based on the principle of value addition.

GST Workflow
GST Workflow

 

Comparison Table Between VAT and GST (in Tabular Form)

Parameter of ComparisonVATGST
ApplicabilityOnly on sale of goodsOn every supply of goods and services
Tax between state and CenterState government gets the whole shareIt is divided between the SGST and CSGT.
Input CreditCan only be claimed for goodsCan be claimed for both products and services.
Mode of PaymentOfflineOnline
Timeline of identifying input tax credit mismatchMismatch identified after almost two to three years. Hence taxpayers incurred a lot of losses.Mismatch identified after one month. Hence taxpayers are saved a lot of money.

Main Differences Between VAT and GST

Notably, to avoid the misunderstanding of the two kinds of taxes, it is essential to comprehend their differences.

Type of Tax

Foremost, the state government imposed the VAT at each level of production or distribution of goods.

It implies that value addition made by an organization is equal to the difference between the earnings and the cost of purchases.

It allows the buyer of the goods to avail input tax credit; for example, the tax paid at the previous stage is deducted from the next tax liability.  However, for this to be possible all dealers need to obtain registration.

On the contrary, GST is based on the value-added tax that is charged on the production, sale, and consumption of goods and services.

It is crucial to note that GST applies to the value addition at each level and no other tax would be imposed unlike in VAT to get rid of the cascading effect.

In other words, VAT was a method of imposing taxes on the general public while GST changes the focus towards the consumers. The following are the primary differences between VAT and GST.

Applicability

GST applies to both services and goods.  GST has unified the Indian taxation system. In that, GST has incorporated all the indirect taxes in India to bring down unwanted inflation in the economy.

On the other hand, VAT is applicable only to the sale of goods.

The previous taxation system brought about high tax rates paid from the pocket of the final consumer.

However, GST has reduced the burden of the common taxpayer.

Tax between State and Center

Notably, VAT tax rates were dissimilar in each state. Besides, each state kept the whole amount of the collected tax. 

However, both the SGST and CGST are collected from the supply of goods and services. The central and state governments share the amount received.

Input Credit

In VAT, input tax cannot be claimed for services as VAT is only applicable to goods.

Hence, in VAT, the dealer has the right to only give his net VAT liability by deducting input VAT on the products purchased and from the output of the goods sold.

 In GST, the input tax credit is claimed for goods and services. The GST portal system computes the input credit that is used to make payments of the next GST liability.

Besides, in GST the input credit can be made available in case of interstate sales whereas in VAT it is not possible.

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Mode of Payment

VAT payment was not necessarily done online as many functions were not automated.

The registration and payment of VAT were done offline. The system was cumbersome as taxpayers had to fill all the paperwork manually.

However, with the GST system, it is compulsory to make payment and registration online.

GST has been made an online system where all the functions are done through a common GST portal that is managed by the Goods and Services Network.

Notably, this has made the process easy.

Timeline of identifying Input Tax Credit mismatch

Automation has brought a massive difference as under GST; they have introduced an automatic monthly reconciliation of transactions.

Arguably, this has made the taxpayers be able to identify any mismatches of input tax credit immediately.

Hence, taxpayers can be able to follow up and make the necessary changes early, significantly reducing the credit loss.

However, under the VAT, the taxpayer was only informed of any mismatch after the assessment of that particular tax period.

Notably, this resulted in severe repercussions on the taxpayers, especially if the amount was significant.

This is because the cash outflow of these mismatches was rectified after almost 2 to 3 years after the transaction took place.

Hence taxpayers incurred permanent credit loss.


 

Frequently Asked Questions (FAQ) About VAT and GST

  1. Is VAT included in GST?

    Goods and Services Tax is basically a repackaged Value Added Tax system. The way GST is structured aims to solve the challenges faced by VAT compliant businesses.

    The VAT may be more meaningful to financial experts than GST, but they are both a general consumption tax.

    Globally, the line between VAT and GST is very thin, to a point that they are considered the same and used synonymously in some countries.

    GST is a necessary step in different countries to simplify tax collection and provide data-driven transparency across the economic spectrum.

    Every country may have its own exclusions, inclusions rates but the difference between the two is not much.

  2. Which is better GST or VAT?

    GST is regarded as a tax reform that impacts different sectors across economic spectrums, bringing in numerous benefits for consumers and stakeholders.

    Basically, GST has some significant advantages over VAT.
    In most countries, when it comes to VAT, you can get credit for tax paid but there’s a limitation – you only get credit for VAT paid and not on any other indirect tax.

    For GST, you get credit for paid GST. There’s no discrimination on whether you have paid for a service, manufacture or trade. The VAT is only applicable to goods sold, not services.

    However, GST is applicable for both services and goods and will have a uniform pricing structure.

    The VAT is the tax paid by manufacturers for additional value created on goods.

    For instance, if raw materials cost $50 and the finished product costs $100, the value that has been added to the raw material is $50. GST rides on the VAT calculation.

  3. Is VAT allowed after GST?

    No! It doesn’t make sense charging VAT after GST. GST is basically a repackaged VAT and aims at improving VAT.

    GST rides on the process and policies used for VAT collection thus it’s not necessary for VAT to be allowed after GST.

  4. Can restaurants charge GST?

    Yes! Depending on taxation policies in place for a country, restaurants may or may not charge GST.

    For those that charge, the rates differ based on different factors, particularly to a country. GST makes it easier to tax goods sometimes sold as services such as food.

    The following are just some example factors that affect the GST collected:
    1) Supply of drinks and food in a restaurant having a liquor license.
    2) Supply of drinks and food in a restaurant not having central heating or air-conditioning any time of the year and not having a liquor license.
    3) Supply of drinks and food in a restaurant having central heating or air-conditioning any time of the year.


 

Infographic

VAT vs GST

 

Conclusion

To sum up, both VAT and GST are imposed by the government for the valuation of goods and services. However, VAT is indirect and repetitive while GST is direct and straightforward.

The ease of application of GST has left its mark on various business operations.

The VAT was brought about to replace the old sales tax to remove the cascading effect to some extent.

Similarly, GST was embraced over the VAT, which incorporated other taxes like entry tax, surcharge, excise duty, and others to improve the taxation system.


 

Word Cloud for Difference Between VAT and GST

The following is a collection of the most used terms in this article on VAT and GST. This should help in recalling related terms as used in this article at a later stage for you.

vat and gst
Word Cloud for VAT and GST

 

References

  1. https://journals.sagepub.com/doi/abs/10.1177/0971890720120109
  2. https://www.fcf-ctf.ca/ctfweb/Documents/PDF/2005ctj/05ctj3-berhan.pdf