The introduction of Goods and Services Tax (GST) in India has significantly transformed the indirect taxation landscape, overshadowing the earlier system that included Value Added Tax (VAT), excise duty, and service tax. This transformation primarily addresses the cascading effect of taxes that burdened the economy under the previous tax regime.
The government designed the Goods and Services Tax (GST) as an advanced taxation system to unify the tax structure across the nation under the principle of ‘one nation, one tax. Implemented to resolve key issues faced under the VAT regime, GST eliminates the cascading effect of taxation—where taxes were levied on taxes at each stage of the supply chain. This simplification means the end consumer no longer pays tax on taxes already paid, making the tax system more efficient.
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In 2005, the government introduced Value Added Tax (VAT) in India to replace the previous sales tax system. It applies indirectly at each stage of the supply chain on goods and services. Although VAT aimed to create a unified market with consistent tax rates, its significant drawbacks led to its merger into the GST framework. The government continues to subject certain products, like petrol, diesel, and alcohol, to VAT, excluding them from the GST regime.
While VAT and GST may appear similar, they have distinct differences. Here’s a detailed comparison to highlight these differences.
Both systems have different methods of tax calculation, which can be illustrated through a practical example:
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| Parameter | GST | At the time of the sale of goods |
| Where is it taxed? | On both goods and services | On the sale of goods (service tax for services) |
| When is it applicable? | On supply of goods and services | The dates for filing returns are 10th, 15th, and 20th of the next month for the preceding month |
| Tax rate and laws | Tax rates are uniform across India | It has different rates and laws in each state |
| Authority over taxes | The collected tax is equally shared by the state/central government | The collected tax is confined to the state in which the sale takes place |
| When is the return filed? | Returns need to be filed every 20th of the next month for the preceding month | Both online and offline payment options are available (Online payment is mandatory if the GST payable is more than Rs. 10,000) |
| Mode of payment | The dates for filing returns are the 10th, 15th, and 20th of the next month for the preceding month | The only offline payment option is available |
| Input tax credit | Input tax credit benefit is available, i.e. a taxpayer can claim the credit on the supplies (Goods and Services) received | No input tax credit benefit is available on customs duty paid |
| Compliances (Movement of goods) | A similar set of compliances for the movement of goods between states | Compliances for the movement of goods between states differ from one state to another. |
| Who collects the tax? | consumer state | The seller’s state |
The implementation of GST in India has marked a significant improvement over the previous VAT system, providing a more streamlined and efficient taxation framework. Despite some products like petrol, diesel, and alcohol remaining outside the GST umbrella, the overall benefits of GST in eliminating the cascading effect and simplifying compliance make it a progressive step for the Indian economy. As GST continues to evolve, we can anticipate further inclusion of goods and services into its regime.
The primary difference is that GST is a unified tax applicable to both goods and services, whereas VAT is levied only on goods at the state level and can still result in a cascading effect.
GST was implemented to simplify the tax structure, eliminate the cascading effect of taxes, and create a unified market across India.
Yes, products like petrol, diesel, and alcohol are still taxed under VAT and are not included in the GST regime.
GST benefits businesses by allowing them to claim input tax credits, reducing the overall tax burden, and simplifying compliance through a single tax return system.
Under the VAT system, input tax credits are limited compared to GST, where businesses can fully utilize their input tax credits against output tax liabilities.
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