GST was implemented on 1st July, 2017. The fundamental motivation for enacting the GST policy was to prevent inflation caused by the old taxes structure’s double taxing effect.
A consumption tax imposed on a product at each level of the production chain is known as VAT. When it was adopted in 2005, the Value Added Tax (VAT) was a major overhaul of India’s tax structure. Due to concerns with India’s prior taxation system, where the cascading impact of taxes had a detrimental effect, this reform was sorely needed.
What is GST (Goods and Services Tax)?
GST is India’s most economically significant post-independence tax reform and has completely changed the notion of taxes. It is straightforward and more convenient than past tax arrangements since it is based on consumption. On a larger scale, it has ignored societal issues such as tax evasion and corruption.
Over time, it provided an incredible boost to the Indian economy and society and raised government income. It effectively eliminated the major flaw in the prior tax structure, namely the cascading effect.
GST (goods and services tax) is a value-added tax collected at every stage of the supply chain. During the previous indirect tax period, the tax paid on commodities or services was not always available to offset the output tax burden. The excise paid by manufacturers, for example, could not be offset against VAT.
What is VAT (the previous Tax structure)?
Most people are familiar with the VAT system even if they don’t own a company or manage a business. For example, if you buy anything or stay at a hotel, the bottom section of the bill will likely include an additional fee in the form of a percentage. The value-added tax, or VAT, is the term for this.
A consumption tax imposed on a product at each level of the production chain is known as VAT. When it was adopted in 2005, the Value Added Tax (VAT) was a significant overhaul of India’s tax structure. Due to concerns with India’s prior taxation system, where the cascading impact of taxes had a detrimental effect, this reform was sorely needed.
Pros and cons of GST and VAT
Here are the merits and demerits of GST described below.
Merits:
- GST is a comprehensive indirect tax that has helped eliminate the cascading effects of tax that were evident earlier.
- GST has reduced the number of Indirect Taxes.
- The GST can be registered online.
- Because there are fewer GST Compliances, you won’t have to devote as much time to GST Return Filing.
- The ease with which e-commerce businesses can do inter-state trade after obtaining GST registration in India.
- GST has brought order to India’s unorganized business sectors through online procedures.
Demerits:
- The GST has raised business costs, and many SMEs are still unwilling to do online transactions or pay taxes online.
- The GST regime is stringent, and you can’t produce e-way bills unless you file a GST Return. As a result, you won’t be able to move your goods over state lines unless you register for GST and file your taxes on time.
- Enrolment in the GST is still challenging for firms in rural regions.
- It has raised the compliance burden.
- Failure to comply with GST might result in fines.
Advantages of VAT
- VAT generates consistent income since it is a consumption tax and is easier to handle than other indirect taxes.
- It reduces avoidance due to the catch-up impact of VAT.
- VAT generates a large quantity of money at a low tax rate.
- Because the VAT is collected in modest amounts, the impact on customers is kept to a minimum.
- Because VAT is a non-discriminatory tax, it may be levied on any business.
Disadvantages of VAT
- VAT deployment is costly since it is reliant on a whole billing system.
- Calculating the value-added at each stage is not a straightforward procedure. Hence, it is difficult to comprehend VAT.
- VAT is a regressive tax.
- All purchase and sales records must be kept, resulting in higher compliance costs.
- Consumers must be aware of VAT to be implemented successfully; otherwise, tax evasion would be widespread due to phony invoices.
Difference between GST and VAT
The following are the most significant distinctions between the VAT and GST structures:
| Parameter | VAT | GST |
| Structure | The central taxes applicable under the former taxation system were customs duty/central excise duty, central sales tax on commodities and services, surcharges, and cesses. State VAT, WCT, entertainment tax, luxury tax, gaming, betting, and lottery tax, sales tax deducted at source, surcharges, and cesses were among the state taxes. | Except for motor spirit, petroleum, natural gas, and high-speed diesel, all national and state taxes would be merged under GST, and a single tax will be imposed on all goods and services. |
| Basis of Levy | The site where commodities are made or sold, as well as the place where services are given, will be taxed under VAT. | GST will be imposed at the point of consumption, similar to a destination-based tax. |
| Registration | The registration of VAT is decentralized between state and central administrations. | Based on the entity’s PAN, there would be consistent e-registration under GST. |
| Validation | The technology will partially authenticate the returns under VAT, and complete verification will be subject to state or central authority inspections. | Validation of input credit, tax payments, and utilisation will occur in the GST system, with consistent checks on input credit, tax payments, and utilisation. |
| Filing of Returns and Collection of Tax | Service tax and central excise were uniform in the previous scenario, while VAT differed from state to state. | The GST procedure is standardized, and the deadlines for collecting or paying tax and filing returns are the same. |
| Service Tax | Under the Finance Act, the center imposes service tax on a list of services on a provision/payment basis. | Depending on the regulations governing Place of Supply, the State GST subsumes service tax. |
| State VAT | Except for those that are exempt, all commodities are taxed under VAT. | This tax is subsumed under the GST by the State GST. |
| Excise Duty | Excise duty will be charged up until the point of manufacture under VAT. | The Central GST will replace the excise duty, and the tax will be imposed up to the retail level under GST. |
