When it comes to the term’ indirect tax’, the debate of VAT vs GST pops up in every businessman’s mind. The story of VAT goes back to a decade, when goods were subject to value-added tax. After that, GST was introduced and also replaced VAT over time. These two terms often come up when purchasing every good, yet they are quite different. Knowing the difference between VAT and GST can help you make the right purchase of your goods. Both belong to indirect taxes, but their way of imposing taxes on goods is different.
There is a big difference between VAT tax vs GST. Let’s break down what sets them apart and describe the core difference.
Definition of VAT(Value Added Tax)?
VAT is known as “Value Added Tax,” which is a comprehensive indirect tax levied on goods. It is added to goods and services at each stage, starting from manufacturing to sale. VAT is considered an important element of the tax system that indirectly affects every transaction in economic life. The main feature of VAT is the input tax deduction procedure, which allows companies to deduct the VAT that they pay on every purchase.
Now, VAT applies to some specific products and businesses. A proper VAT management supports businesses in their growth and expansions by fulfilling all the requirements and optimizing the cash flow.
What is GST(Goods and Services Tax)?
GST (Goods and Services Tax) is an indirect tax that is added to goods. It is added in every stage of value addition in the supply chain. GST simplifies the tax system, improving official requirements, and ensures legal tax collection. Basically, GST is considered multi-stage taxation, value addition taxation, and destination-based taxation. It is known as destination-based taxation because the tax is collected at the point of consumption, rather than the point of origin. GST was initially structured as 0%, 5%, 12%, 18%, 28%, 40%, etc, for different products.
Comparison of Value Added Tax and Goods and Services Tax
It is important to know the VAT vs GST difference as they are different. Follow the table to get an overview of a detailed comparison between VAT vs GST tax.
| Criteria | VAT (Value Added Tax) | GST (Goods and Services) |
| Tax Applied | VAT is imposed on the sales of goods. | It is imposed on goods and services. |
| Particular time to apply tax. | It is applied at the time of the sale of goods. | GST is applied at the time os supply of goods and services. |
| Payment Options | Value Added Tax payment can only be made through offline payment. | It can be made through both online and offline payments. |
| Registration | VAT is compulsory if your turnover is a higher amount. | Goods and Services is compulsory if your turnover is a higher amount than $100,000. |
| Tax Filing Timeline | It should be paid by the 10th or 15th of the month. | GST should be paid by the 20th of every month. |
| Benefits of input tax credits | No benefits available. | Several benefits are available, including travel benefits, reduced tax liability, etc. |
Impact of VAT & GST on the Economy
VAT and GST play a crucial role in generating high revenue. These two have significant roles in the distribution of income, as they have a direct impact on goods and services. They are applied uniformly to the purchase of goods and services. But the effect of indirect tax is really higher for those who have a lower income. Business also faces difficulties when it comes to GST and VAT, including digital products and services, and also need to stay updated and follow new rules and regulations.
What are the GST VAT Tax Challenges for Businesses?
Every business faces several challenges in following the indirect taxes, like GST and VAT, particularly when they are managing cross-border transactions and providing digital services. As per the rules and regulations, businesses will collect taxes not only in their own locations but also in other locations where they have their customers. For this process, the business should first register with the country, following the registration criteria.
Calculation of GST Tax vs VAT
It is important to know the right way to calculate GST and VAT. So, follow the guide to know the ways to calculate VAT and GST.
GST Calculation
- Tax collected on sales.
- Tax paid on goods purchased.
- Output Tax- Calculate the tax on the selling price after applying GST rates.
- Input Tax- Deduct the input tax credit from the output tax.
- Let something is sold at $2000, and the GST is 18% then the final value will be
- $2000+{ $2000(18/100)}= $2000+$360= $2360
VAT Calculation
- Tax is imposed at every stage of production and sale.
- Tax is calculated on the value added at each stage of sale.
- Output VAT- calculated on the value added on the product.
- Input VAT- Tax paid on purchasing the product.
- VAT Pay= Output VAT- Input VAT.
Conclusion
In the end, we want to say that both GST and VAT are to impose tax on goods. But they are not the same. Hope this article VAT vs GST will help you know the difference between these two. The major difference between these two is that VAT is imposed on goods while GST is imposed on both goods and services. If you want to know more about these two, then you can easily connect to our official site to seek professional help.