What is the difference between VAT and GST?

GST has come into the picture and this calls for a lot of changes and with that rules of old vat cannot be depended anymore as it is that many business will have to compulsory apply for GST registration. The difference is mainly how all the extra taxes will be filtered and how all the taxes will no longer be separated for example GST will make service and goods taxes into one for business like restaurants.

To learn the difference between the current taxation and the new GST tax in India you will have to know exactly what is GST tax. GST is basically a tax policy that will bring uniform market all around the country. This system will reduce the complicated structure of taxation as it will create a common market. This will also reduce the burden of a tax payer as it will reduce the indirect tax and will also reduce the import and export taxes.

The business that have an income lower than 20 lakhs there is no requirement for registration in GST and also it will remove several taxes that the payers pay without realizing as it is a tax on tax and GST also provide a clear view of what tax you are paying.

In India GST tax will replace almost all the indirect taxes and bring a common market for easy tax structure and simple tax payment. The cost of tax on all the commodities will lower as the result of GST implementation. The excise is removed as the tax on tax is one of the major reason that the rate of tax goes up once it is traded. But with GST this becomes several times less and easier.

Differences

Currently we have VAT and service tax which are taken separately as VAT is for goods and service separately for service while GST is common for both making it a simpler taxation system.

The current taxation gives rise to a high tax rate as it has several indirect tax and that increases the tax rate along with every state having their own tax rate which increases the amount of tax rate as the goods are being transported from state to state which will no longer be a problem when GST is implemented. It will have no separate tax based on good or services and state borders which will make it easier and less expensive for importers and exporters.

VAT was calculated on the value of sales of good or services which but with the tax rate that is already levied on the goods. But it changed to only paying tax on value addition and separately for the service. With GST coming into the picture the tax will be collected together without separate tax for goods and services.

All work of taxation will available online. Like registration, returns, payments, etc. This will make everything simpler for tax payers and increase the transparency of all the activities.
GST will remove all the differences in the structure of taxation in between the states and the indirect tax this will lead to neutral tax and common market.
There are several hidden costs of doing business that piles up in the business chain which will be filtered while paying tax with the help of GST.
The reduction in the taxation and improvement of tax policies will lead to better competition in trade business.

Central and state governments

All the central, state and indirect taxes are replaced by GST making it all simpler to manage and pay.
GST will make better tax compilation with the seamless transfer of input tax credit from one stage to another in the chain of value addition.
GST will be reducing the tax collection of the government which will lead to higher revenues.
Consumer
Due to the high tax rate and tax on every item and value being added by the time it reaches the consumer the amount increases but with GST the consumer will be paying clearly only for one and have a clear view of what is her or she paying for.
Overall tax burden will reduce and the consumer’s burden will decrease preventing leakages.

The taxes that are being charged by central and state are:
• Central
• Central excise duty
• Service tax
• Additional excise duty
• Additional custom duty
• Special additional duty of customs
• State
• Taxes levied by local bodies known as entertainment tax
• Central sales tax
• State value added tax or sales tax
• Entry tax and Octroi tax
• Purchase tax
• Luxury tax
• Taxes on lottery and betting and gambling
• Impact of GST tax in India

After the GST is implemented there will be certain amount of impact in ever sector. Let us look at these impacts one by one in a brief manner. Some of these impacts can be temporary while others may remain permanent. The impact is expected in a high rate as the sudden change in the game of tax is going bring slight or a huge leap in the world of business depending on the category of business.

Automobiles

It will result in 10-17 percent of fall in prices assuming 18 percent GST rate. Lesser benefits might be accrued by the tractors as these are against the taxes paid on input. Though looking on the bright side the automobile sector will emerge as the tax that this field is paying a much higher tax than the tax that will be acquired from it after the GST implementation.

It will lead to the easy and direct transfer of vehicles to the dealer. The stock will be transferred to your own warehouse and further will be transferred from warehouse to dealer.

Textiles

The tax for textile industry is divided into 9 categories at the moment that varies from 4 to 12 percent. The textile sector is also bound to pay taxes to the unorganized players who extract tax based on the size of the business. It depends on the fiber if it is natural or manmade as the synthetic requires high service and the natural requires almost no duty. The mills are taxed at higher rate more than the power looms which discourages the integration of production. The GST implementation will boost exports as it will have no complicated schemes.

Engineering, capital goods and power equipment
GST will have a positive impact on these and it will improve the prospects of engineering, capital goods and power equipment (ECPE) sector by reducing all the complications.
These industries are involved with both manufacturing and servicing of the goods which makes the tax rate of these business high because of double tax and also creates a puzzle ground of structure. This will be broken down into much simpler structure with help of GST due to common tax.

Hotels
Let us estimate that the GST rate will be 18% in this case the impact will remain neutral as currently the hotels pay 8.7 percent and luxury tax at around 8-12%. Restaurants pay service tax at around 5.6% and VAT at around 12%- 14.5%.

Logistics
GST will lead to elimination of central sales tax and inter-state value-added tax arbitrage possibilities. This will lead to consolidation of warehouses and increased efficiencies in the logistics chain.

Pharmaceuticals
It could bring a negative impact on this sector. The indirect paid by this sector could increase by 60 percent which is a thing to worry about and MRP could increase by 4 percent.

FMCG
The FMCG will receive a positive for household and personal care space. It will reduce 200 to 500 basis points, apart from reducing the warehousing and logistical requirements. However the working capital for retailers and additional tax rates for jewelry and cigarette manufacturers are negatives and will attract higher GST regime than companies like ITC which are going to be affected adversely.
Telecom
All the service related sectors are expected to suffer from this implementation as the service tax might shoot up. Even the moderate rise in tax could blow a hit on demand and profits.

Impact of GST in India
• Will bring support to smaller business as it will not collect tax from business that do not have enough revenue according to the GST rule
• The present tax gives an incentive to evade taxes because excise duty was a cost for traders, there by taking it attractive for them to purchase without invoice
• The poorer states will have to pay equal amount of tax which will help them to develop
• Any new business requires making a VAT registration from sales department. There are different process in every state and that makes it difficult for business owners to start branches in different states which will be removed with GST implementation
• It will remove the layered tax from some goods and hence the prices are likely to come down for such products
• According to the prediction the economic growth of at 2% is expected once GST is implemented
• It will widen the tax regime by covering goods and services and increase its transparency
• It will subsume all the indirect taxes at the center and state level
• It will free the manufacturing sector from cascading effects of taxes and leading to the improvement of cost competitiveness of goods and services
• The prices of goods and services will go down thus increasing the tax GDP ratio
• Doing business in India will be much easier as the rules and structure will be made much simpler
• Only three accounts will have to be maintained CGST, SGST, IGST. This will simply all the tax system that we currently have
• GST is beneficial for both economy and corporations as it will reduce several burdens on production cost and making exporters more competitive
• It will reduce corruption as it will help in building a transparent and corruption free tax administration. There will also be a reduction of departments which will reduce corruption
• The entire country market will be unified market which will make every cost lower for doing business in other states and importing or exporting
• Suppliers, manufacturers, wholesalers, retailers will be able to recover GST incur more input costs as tax credits. This will reduce the cost of doing business, thus enabling fairer prices for consumers. Companies which are under organized sector will come under tax regime. More business entities will come under the tax system hence, widening the tax base. This will lead to more revenue collections
• Wider base of SMEs will be in the GST basket
• The SMEs restrict their trade to local purchase and sales as they are forced to bear the tax burden on the interstate sales for which they cannot avail the input set-off, thereby increasing their cost of production. This case will no longer prevail with GST implemented

After the GST is implemented the business that use software for their business will have to get their software GST ready. Hence making your business GST ready because just registration is not enough your entire business management will have to be GST ready. Finding the right software might be a little tricky as you do not just require a GST ready software but the right software that is GST ready.

Reach accounting software is a business management tool that is cloud based and is GST readymade especially for SMEs and is customizable for any kind of business. Reach is a feature rich software that is easy to use but is a powerful software that manages a business from every single side.

It is cost effective and helps your business in improving. Being an online software it provides bank level security and is accessible from anywhere. It simplifies business and helps in gaining more profit. It already reduces your accounting work and with GST ready it simplifies your taxation and accounting to the maximum.
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Sumathi

I’m a tax expert with over 10 years of professional experience. I’ve gained practical insights on GST and other Taxes during my tenture as a Tax expert and GST Trainer in Reach Accountant.