VAT – Value Added Tax
VAT is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/ distribution chain. The term ‘value addition’ implies the increase in value of goods and services at each stage of production or transfer of goods and services.
VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer. It is a multi-stage tax with the provision to allow ‘Input tax credit (ITC)’ on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. It is given for all manufacturers and traders for purchase of inputs/supplies meant for sale, irrespective of when these will be utilised/ sold. The VAT liability of the dealer/ manufacturer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund.
VAT is basically a State subject, derived from Entry 54 of the State List, for which the States are sovereign in taking decisions. The State Governments, through Taxation Departments, are carrying out the responsibility of levying and collecting VAT in the respective States. While, the Central Government is playing the role of a facilitator for the successful implementation of VAT. The Ministry of Finance is the main agency for levying and implementing VAT, both at the Centre and the State level.
GST – Goods and Services Tax
The GST often replaces some combination of excise taxes, duties and taxes on behavior, which include taxes on betting, luxury goods, entertainment and entry into the country.
GST is imposed at every stage of the supply chain. A 6 percent tax, for example, may be imposed on the suppliers of raw materials, again upon the manufacturer who uses those materials and then successively on the distributor, retailer and consumer. While this appears at first to be a burdensome accumulation of taxes, because each payer of the GST is also tax credited for that payment, the actual burden is significantly lower.
The fundamental ideas underlying the GST are:
- Equity: Everyone pays. Countries, such as Spain and Greece, that have attempted to impose many different kinds of taxes often end up with many wealthy tax cheats and many tax-burdened urban poor.
- Efficiency: It replaces the time-consuming and manpower-intensive imposition of several different taxes with a single tax, thus lowering overhead expenses for government, producers and consumers.
- Accountability: Many countries have many relatively high taxes — for example on ownership of real estate or even specific entities such as swimming pools — but in the confusion of many different taxes and avenues of collection, these taxes are often uncollected. Because a record of payment must be made at every transaction in the sequence from origin to consumer, the GST is relatively easy to police and therefore to collect.
Although explanations of the difference between the two taxes are plentiful on the Internet, most government ministries treat them as one tax with two names. In a 2006 position paper, “International VAT/GST Guidelines,” the International Organisation for Economic Cooperation and Development begins by noting that the VAT is “also called the Goods and Services tax.” Other countries’ finance ministries, such as Malaysia’s and Botswana’s, make similar assertions. No country has both a VAT and GST.
Nevertheless, pursuing the difference or its lack may be a linguistic dead end. Since the implementations of this tax, whatever it is called, vary so significantly from one country to another, it is relatively easy to discuss the difference between one country’s VAT and another country’s GST. But it is equally easy to discuss the differences in the taxes of two countries, both of which call their tax a VAT, or between the taxes in two other countries, both of which call their tax a GST.
There is, however, a difference between the GST/VAT and a sales tax. Sales taxes are not necessarily imposed at every stage of the supply chain and may be imposed only on the consumer where as GST/VAT may be imposed on every stage of supply chain. Many countries have both a comprehensive GST/VAT and a sales tax.