VAT: All you need to know value-added tax

What is indirect tax?

An indirect tax is an extra amount levied on the retail price. It is paid by the consumer as part of goods’ and services’ maximum retail pricing. The price on a value includes tax paid by the previous buyer. Thus, the separate entity pays tax on already paid tax. One form of indirect tax is VAT.   

What is VAT?

VAT full form is Value Added Tax. VAT was introduced into the taxation system in April 2005. VAT was introduced as a replacement for sales tax and to integrate India into a single market system. However, states like Gujarat, Tamil Nadu, Rajasthan, Madhya Pradesh, Chhattisgarh, Uttarakhand, and Uttar rejected the VAT taxation system during the initial implementation. On June 2, 2014, VAT was implemented in all states and union territories, except the Andaman and Nicobar Islands and Lakshadweep.

VAT was imperfect as it lacked the removal of distortions in the movement of goods across states and the uniformity in the tax structure. It had no tax credit for inter-state trade that undermined the benefits of enforcing a VAT system. 

Thus, in 2017 the central government introduced GST (Good and Service Tax) in India.

What is GST?

GST is a tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but is remitted to the government by the businesses selling the goods and services. GST was first opted by France in 1954. Since then, almost 160 countries have adopted this tax system.

In 2017, India introduced a dual GST structure, which was the biggest reform in the country’s tax structure in decades. The dual GST structure in India is a simple tax with different taxation rates – the Central Good and Service Tax (CGST) and the State Good and Service Tax (SGST). In a dual GST tax structure, central and state governments both can levy and collect taxes via appropriate legislation. The primary objective of GST was to eliminate double or cascading taxation from the manufacturing level to the consumption level.

Different tax bracket within GST

There are four tax brackets within GST.

 

• List under the 5% GST slab rate:

 

• Edibles 
• Fuel (Coal and biogas)
• Fertilisers
• Life-saving medicines and drugs
• Accessories for specially-abled individuals
• Incense sticks and Agarbatti
• Footwear and apparels under Rs. 1000
• Handmade items (Carpet, braids, etc)
• Aircraft leasing
• Crude and petroleum products transport

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• List under the 12% GST slab are:

 

• Processed food
• Dairy products
• Dry fruits and nuts 
• Packaged food
• Cooking utensils
• Sewing machines
• Corrective spectacles and glasses
• Exercise books and notebooks
• Handbags and alike
• Business class plane ticket
• Movie ticket worth less than Rs 100

 

• List under the 18% GST slab rate:

 

• Eatables (ice-cream, biscuits, etc)
• Capital goods
• Household products
• Perfume
• Cosmetic preparations
• Make-up and beauty products
• Weight-measuring devices
• Electrical and electronic appliances
• Suitcase and alike
• Wrist watches
• Cooking items (stoves, cutlery and cookers)
• Razor and Razor blades
• Stationary (Pencil-sharpeners, Clips, Staplers)

 

• List under the 28% GST slab rate:

 

• Instant coffee
• Aerated water
• ATM vending machine
• Air conditioners
• Dishwashers
• Fax machines
• TV monitors over 32 inches
• Stoves (excluding LPG and kerosene)
• Powder

 

What are the advantages of GST?

• Uniformity in Taxation.
• Helping Government revenue find floating cash reserves.
• No cascading of taxes.
• Simpler and lesser number of compliances.
• The lower tax burden on Industry and Trade.
• Regulation of unorganised industries.
• Simple online procedure.

What are the disadvantages of VAT?

• Increased compliance cost as records of all purchases and sales needs maintenance.
• VAT is a consumption-based tax. It is collected more by the state, which consumes more goods, and not by states, which produce more.
• Since it is a tax on the expense, it is regressive in nature. It affects the poor more as they spend more proportion of their income than the rich.
• Cascading effect of taxes.
• It is impossible to claim Input Tax Credit (ITC) on service.
• Each state has its own VAT rate and laws.