VAT was designed to be a progressive consumption tax that imposes a single rate or tax on all goods and services. The rate can vary depending on the country, but it is usually somewhere between 15% and 25%. GST is an indirect tax that is meant to raise revenue for the government by taxing goods and services, as well as property and some people’s income. VAT is a value-added tax imposed on goods and services with multiple stages of production. So, in this blog, we will have a look at the core difference between VAT and GST with the help of a table and different key points.
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What is VAT?
Value-Added Tax (VAT) is an indirect tax levied on the value added to goods and services. It is imposed at each stage of the production process, from the initial purchase of raw materials to the final sale of the finished product. The amount of VAT payable is calculated as a percentage of the value added to the good or service at each stage of production.
Further, VAT is a consumption tax, meaning that it is ultimately borne by the final consumer of the good or service. However, businesses are able to recover the VAT paid on their inputs (e.g. raw materials, office supplies, etc.) through a system of VAT credits. This ensures that businesses are only taxed on the value added by them, rather than the full value of the good or service.
What is GST?
In contrast, Goods and Services Tax (GST) is a consumption tax levied on the sale of goods and services. Unlike VAT, which is levied on the value added to goods and services, GST is levied on the sale price of the good or service. GST is typically imposed at a single stage, such as when a consumer purchases a good or service from a business.
Moreover, GST is a tax on final consumption, meaning that businesses are not able to claim input tax credits for the GST paid on goods and services purchased for use in their business. This makes GST a more regressive tax than VAT, as businesses must bear the full cost of the tax. GST is also known as a value-added tax (VAT) in many countries.
VAT Vs GST(Comparison Table)
The following table exactly compares VAT vs GST.
Five Key Differences Between VAT and GST
- Tax Base: VAT is levied on the value of goods and services at each stage of production and distribution. On the other hand, GST is levied only on the value added to goods and services at each stage.
- Input Tax Credit: In a VAT system, businesses can claim a credit for VAT paid on inputs (raw materials, components, etc.) against the VAT they owe on outputs (sales of finished products and services). This is not possible in a GST system.
- Registration: In a VAT system, all businesses must register for VAT if their taxable turnover exceeds a certain threshold. On the other hand, in a GST system, registration is voluntary for most businesses, except those engaged in interstate trade or providing certain exempt supplies.
- Returns: Under a VAT system, businesses must file regular returns reporting their sales and purchases, as well as the tax due. In contrast, GST returns are filed monthly or quarterly depending on the business’s turnover.
- Rates: VAT rates vary from country to country, but are typically between 0% and 20%. On the other hand, GST rates also vary depending on the goods and services being supplied but are typically between 0% and 15%.
Three Similarities Between VAT and GST
There are three primary similarities between value-added tax (VAT) and goods and services tax (GST):
- Both VAT and GST are consumption taxes, meaning they are levied on the sale of goods and services.
- They are charged as a percentage of the sale price.
- Finally, both VAT and GST apply to most goods and services sold in a country.
In conclusion, it is evident that there are several key differences between VAT and GST. Most notably, VAT is levied on the sale of goods and services at each stage of production. GST on the other hand is only levied on the final sale of goods and services to the consumer. Additionally, VAT is typically imposed on a much wider range of items than GST. Finally, VAT rates vary significantly from country to country, while GST rates are relatively uniform across countries.