What is GST ?
Goods and services tax is a tax on the supply of goods and services, or both. The few exceptions being
Supply of alcoholic liquor for human consumption.
Petroleum
Tobacco
GST is destination based consumption tax i.e. tax would accrue to the state in which goods or services are finally consumed. GST having a dual tax structure both centre and state will have the power to levy tax on local supply of goods and services. GST is an integrated tax and has subsumed various indirect taxes in itself like VAT, Service Tax,etc.
What is VAT?
Value Added Tax (VAT) is an indirect value-added tax that was introduced into the Indian taxation system on April 1, 2005. As a taxation concept, VAT replaced Sales Tax. VAT was introduced in India to make it a single integrated market. On June 2, 2014, VAT was implemented in India's states and union territories, except the Andaman and Nicobar Islands and Lakshadweep Islands.
Why GST was introduced?
Due to the various problems regarding our old taxation system, like double taxation, higher burden on the consumers, and various procedural requirements at the various levels, the government of India has decided to abolish all multiple tax requirements and has introduced a single taxation system for all the indirect taxes known as Good and Service Tax.
What were the problems regarding VAT?
The various ills of VAT taxation system which paved a way for the introduction of GST - one nation one tax are:
Cascading effect of taxes
No ITC on services rendered
Different VAT laws in every state
Inter state tax credit was not possible to be claimed
What were the challenges before the GST
Legacy issues which will use resources.
Non Harmonization of Tax rates.
Lack of Procedural Manuals.
Double Registration- Handling old Registration.
Poor Quality of tax Returns.
No existing system for 100% scrutiny of Tax Returns and Audit.
Lack of Cross Verifications with other tax administrations.
Lack of mechanism to control Evasion.
Understand the Difference Between GST and VAT
GST has been designed as a comprehensive, destination-based taxation concept. It aims to streamline the tax levy, collection, and monitoring process and overcome taxation's cascading effect. There may also be revenue gain for the Centre and states due to the widening of the tax base, increase in trade volumes, and improved tax compliance.
S No | Particulars | Old VAT/ Indirect Tax System | New GST Model |
1 | Nature of Tax | Based on Origin or value addition | Destination-based tax on final consumption |
2 | Central Taxes Subsumed | Central Excise Additional Duty of Customs Service Tax | CGST |
3 | State Taxes Subsumed | VAT Purchase Tax Entertainment TAx Luxury Tax Lottery Taxes State Cess and Surcharge Entry Tax | SGST |
4 | Custom Duties Replaced | Basic custom duty Additional Duty of Customs Special Additional Duty of Customs Cess | BCD IGST |
5 | Inter State Taxes Replaced | Excise Duty Central Sales Tax Service Tax | IGST |
6 | Intra State Taxes Replaced | Excise Duty State VAT Service Tax | CGST SGST |
7 | Taxation event | Tax is levied on manufacture, sale/completion of provision of services | Supply of Goods and Services |
A brief comparison between GST and VAT
S No | Particulars | Old VAT/ Indirect Tax System | New GST Model |
1 | Taxation Point | Sale of Goods | Supply of Goods and Services |
2 | Applicability | On goods only | Both Goods and Services |
3 | Registration Threshold | Compulsory if turnover exceeds Rs 10 lakhs | Compulsory of turnover exceeds Rs 40 lakhs |
4 | Collection of revenue | By selling state | GST is a destination or consumption based tax hence ultimate buying state |
5 | Interstate tax credit | Not available (CENVAT applicable) | Can be taken |
6 | Compliances required | Multiple compliances and registrations | Compliance procedure has been streamlined |
7 | Cascading effect | VAT was levied on value addition at each stage, hence resulting in double taxation in some cases. | The ill of Tax on Tax has been eradicated with the introduction of GST |
8 | Online Payment | Online tax payment was not mandatory | It is necessary to make online payment of GST |
How tax is calculated under GST and VAT?
Under GST (Goods and Services Tax):
GST Calculation:
Output Tax: Tax collected on sales (output supplies).
Input Tax: Tax paid on purchases (input supplies).
Tax Calculation Method:
Tax on Output: Calculate tax on the selling price at applicable GST rates.
Tax on Input: Deduct input tax credit (ITC) from the output tax payable.
GST Calculation Formula:
GST Payable = Output GST - Input GST
Under VAT (Value Added Tax):
VAT Calculation:
Tax is levied at each stage of production and distribution.
Tax is calculated on the value added at each stage of the supply chain.
Tax Calculation Method:
Output VAT: Calculated on the value added to the product at each stage of sale.
Input VAT: Tax paid on purchases can be used to offset the output VAT.
VAT Calculation Formula:
VAT Payable = Output VAT - Input VAT
Let us understand how calculations under both the systems of GST and VAT are done
Example of Calculation
Particulars | Tax Applicable | Tax Rate | Taxable Value | Tax Calculated | Total Amount |
Tax Implications under VAT | |||||
Price of manufactured goods | Excise Duty | 12.5% | 10,000 | 1,250 | 11,250 |
Sale of goods | VAT | 14.5% | 11,250 | 1,631 | 12,881 |
Total Amount Payable | 2,881 | 12,881 | |||
Tax Implications under GST | |||||
Consumption of goods | CGST | 9% | 10,000 | 900 | 10,900 |
Consumption of goods | SGST | 9% | 10,000 | 900 | 10,900 |
Total Amount Payable | 1,800 | 11,800 |
留言