The largest democracy in the World, India, a country of 132.42 crore people places an important role in the world’s economy.
In recent time India is considered as a developing economy and the country is gradually being moving ahead and taking numerous fecund measures to make its place among the developed economies of the world.
One such step taken recently by the Republic of India is the implementation of the new unified taxation system. It is called GST – Goods and Services Tax. GST bill is an act which has fought 17 years of battle to get implemented.
Various scholars and economists have shared their views on the effects of GST on the economy of India. Some called it boon while some called its bane.
To give a clear view of the unified taxation system lets us first understand what is GST, what is VAT, their differences and their benefits and differences?
What is GST?
Goods and Services Tax in India is the biggest source of indirect tax and one of the major sources through which Government can generate revenues.
With GST, the system of the unified taxation system has also been implemented, where all the previously levied indirect taxes by Government have been subsumed.
GST is introduced with an aim to simplify the complex tax structure and also to remove cascading tax effect. It has also made the logistics process easy which leads to the removal of geographical barriers and the establishment of One Common Market Place.
A vision of One Nation-One Tax seen by Vajpayee Government 17 Years back finally came true in 2017 in Modi Government.
What is VAT?
VAT – Value Added Tax is a taxation system which was used to followed by the Indian Government prior to the implementation of GST.
The VAT regime works on the cascading system. It means paying tax on the tax. Though it was a producer or a seller who used to bear the tax on Goods or Services but actually the tax was levied from the final consumers.
Therefore, we can say, it is a tax paid by the final consumer to the Government via producers or sellers.
Introduced as indirect value added tax the VAT was implemented in India on 1st April 2005. The problem with this tax system was that it follows the cascading tax effect with different VAT rates.
Difference Between GST and VAT
Ever since the newly implemented GST system has replaced the previously used VAT regime, Indian economy and taxation system have seen numerous changes. Let’s move ahead and take a look at GST v/s VAT regime based on numerous parameters. These parameters are as follows:
1. Tax Structure
Under the VAT regime, Central and State government charged numerous indirect taxes. Central taxes were excise duty, central sales tax, surcharges and cesses. State taxes were the luxury tax, entertainment tax, tax on gambling and many more.
Under GST regime all the taxes levied by the central and state government are subsumed in a single tax. Commodities such as Motor Spirit Petroleum, Natural Gas and High-Speed Diesel are exempted from GST.
2. Levied Basis
The VAT was an origin-based tax. It was levied on manufacturer or seller of goods.
GST is a destination-based tax which is imposed on the final consumer of goods and services.
3. Date of Filing Returns and Tax Collection
There was uniformity in the service and the central excise tax whereas the VAT was charged differently in different states.
On the other hand, the process of collecting and depositing tax is uniform. Filing of returns is common.
4. Cascading Tax Process
The VAT was the taxation system where the tax on goods and services were calculated on the rate on which tax has already been levied. In VAT system, the tax used to charge on every stage.
Whereas in GST, the tax will be charged only one time at the final state of consumption by the consumer.
5. Excise Duty
Under the regime of the VAT, the excise duty tax must be levied up to the point of manufacturing.
In the newly implemented GST regime Excise duty is now replaced by Central GST and levied up to the retail level.
6. Stages of Taxes
During the time when VAT was charged, the tax was used to levy on two stages. The first stage was the time when the product was moved out of the factory and the second stage was the retail outlet.
Whereas in the eco-system of GST, the tax will be levied only at the final consumption of the goods or services.
7. Tax Compliances
The VAT taxation system used to have multiple taxes. It creates complexity in the taxation compliance.
In the GST regime tax compliance is easier and all other taxes are now merged into the one tax under one law.
8. Service Tax
Under the regime of the VAT, the service tax was imposed on the service provides, but was actually borne by the customers.
Whereas the service tax under GST regime is subsumed as CGST, SGST, and IGST.
Learning the Advantages of GST
Implementation of GST brings lots of things in the favour of Indian economy. Following are the major benefits of GST:
- Enhances the value of commodities in the national market.
- Uniform taxation system.
- Elimination of Cascading effect.
- Preparing the one common marketplace.
The Major Advantages of VAT
- VAT taxation system encourages people for savings.
- It was simple to handle and reduces the problems in the export of commodities.
- VAT used to provide stable revenue as it was a consumption-based economic system.
- It facilitates businesses to control the costs by offering the stronger incentives is one of the benefits of the VAT.
Major Concern About Disadvantages of GST
Like the two sides of the same coin, GST is no exception, let us discuss the major disadvantages of GST:
- Under GST regime, service tax raised to 18% from 15%. it has negatively affected services such as telecom, airline, and banking to name a few.
- The complexity is increased now due to the higher control by Central and State Government.
- Due to the tax imposition on products used by disabled people, GST being called Disability Tax by the opposition. Products such as hearing aid and typewriter are now eing taxed. They were exempted from tax previously.
- Mid-year launch of GST leads to several problems like taxation and reporting.
Why GST Replaced VAT? – Drawbacks of VAT
Following Are the Disadvantages of VAT:
- VAT regime was quite complex and costly. It was based on the full billing system.
- The tax under VAT regime was added on every stage and to calculate the same was not an easy deal.
- The cascading system in VAT makes taxation system quite complex. Tax on Tax has become of the major disadvantages of the VAT.