What is the difference between VAT and GST?
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In order to understand VAT (Value Added TAx), first you have to understand Sales-Tax.
In earlier times, the tax was levied on the value of sales of goods (or even on services). It was simple but the problem was that Sales Tax will also be levied on the taxes which are already levied on the goods used for making the final product. For example, if you manufacture something for $100 using inputs of $ 50 and presume the tax rate to be 10%, you have suffered $10 on the final product plus you have suffered $ 5 on the inputs. In your case your value addition has been only $ 50. Hence the tax has actually become 30% rather than 10%. Even if you exclude the input tax, you end paying tax @ 20% on your value addition. If suppose your value addition would have been only $10, your sales-tax would have been same and effecitvely you had paid the sales tax @ 100%.
This is called cascading effect.
Hence the concept of VAT became more popular where you pay tax only on the value addition i.e. $50. This is achieved by giving you credit of $ 5 on inputs which you can use for making payment to your finished goods of $ 10. Hence you pay only the difference i.e. $5 which is exactly the 10% of value addition.
The true VAT can take place only when all goods and services are taxed at the same rate. This rarely happens in real life because there are always different tax-rates for different goods and services. Hence what you pay is always less or more than the % of value addition. For example, if suppose that half of the input in above example was taxed at 5%, your credit will be $ 2.5 + 1.25=3.75 and hence your payout will be $ 6.25 for the value addition of same $ 50, which is actually 12.5% of value addition.
GST is another name of VAT but it taxes both goods and services at the same rates. It eliminates many disputes which arises due to taxing goods and services seperately.
Goods Services Interchangeability
The main purose of GST is to eliminate the dispute of taxing goods and services separately. Nowadays services are sold with goods (e.g. warranty) and goods are sold with services (e.g. SIM card).
While our commonsense tells us that goods are services are totally distinct, in reality, you can sell all goods as services and evade taxes. For example, instead of selling a car (as goods), you can sell the car on lease for 10 years (as service) and save the taxes if service is not taxed or taxed at a lower rate.
GST is expected to eliminate all such disputes because all transactions shall be taxed at the same rate and no distinction is made between goods and services.
In earlier times, the tax was levied on the value of sales of goods (or even on services). It was simple but the problem was that Sales Tax will also be levied on the taxes which are already levied on the goods used for making the final product. For example, if you manufacture something for $100 using inputs of $ 50 and presume the tax rate to be 10%, you have suffered $10 on the final product plus you have suffered $ 5 on the inputs. In your case your value addition has been only $ 50. Hence the tax has actually become 30% rather than 10%. Even if you exclude the input tax, you end paying tax @ 20% on your value addition. If suppose your value addition would have been only $10, your sales-tax would have been same and effecitvely you had paid the sales tax @ 100%.
This is called cascading effect.
Hence the concept of VAT became more popular where you pay tax only on the value addition i.e. $50. This is achieved by giving you credit of $ 5 on inputs which you can use for making payment to your finished goods of $ 10. Hence you pay only the difference i.e. $5 which is exactly the 10% of value addition.
The true VAT can take place only when all goods and services are taxed at the same rate. This rarely happens in real life because there are always different tax-rates for different goods and services. Hence what you pay is always less or more than the % of value addition. For example, if suppose that half of the input in above example was taxed at 5%, your credit will be $ 2.5 + 1.25=3.75 and hence your payout will be $ 6.25 for the value addition of same $ 50, which is actually 12.5% of value addition.
GST is another name of VAT but it taxes both goods and services at the same rates. It eliminates many disputes which arises due to taxing goods and services seperately.
Goods Services Interchangeability
The main purose of GST is to eliminate the dispute of taxing goods and services separately. Nowadays services are sold with goods (e.g. warranty) and goods are sold with services (e.g. SIM card).
While our commonsense tells us that goods are services are totally distinct, in reality, you can sell all goods as services and evade taxes. For example, instead of selling a car (as goods), you can sell the car on lease for 10 years (as service) and save the taxes if service is not taxed or taxed at a lower rate.
GST is expected to eliminate all such disputes because all transactions shall be taxed at the same rate and no distinction is made between goods and services.
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One difference which is worth noticing is the reduced cost which a trader would incur under the GST regime as compared to what would be his outflow until the GST is implemented.Under the VAT system of claiming tax credit,a trader is not allowed to deduct the amount of service tax paid by him on the input services
In earlier times, the tax was levied on the value of sales of goods (or even on services). It was simple but the problem was that Sales Tax will also be levied on the taxes which are already levied on the goods used for making the final product. For example, if you manufacture something for $100 using inputs of $ 50 and presume the tax rate to be 10%, you have suffered $10 on the final product plus you have suffered $ 5 on the inputs. In your case your value addition has been only $ 50. Hence the tax has actually become 30% rather than 10%. Even if you exclude the input tax, you end paying tax @ 20% on your value addition. If suppose your value addition would have been only $10, your sales-tax would have been same and effecitvely you had paid the sales tax @ 100%.
This is called cascading effect.
Hence the concept of VAT became more popular where you pay tax only on the value addition i.e. $50. This is achieved by giving you credit of $ 5 on inputs which you can use for making payment to your finished goods of $ 10. Hence you pay only the difference i.e. $5 which is exactly the 10% of value addition.
The true VAT can take place only when all goods and services are taxed at the same rate. This rarely happens in real life because there are always different tax-rates for different goods and services. Hence what you pay is always less or more than the % of value addition. For example, if suppose that half of the input in above example was taxed at 5%, your credit will be $ 2.5 + 1.25=3.75 and hence your payout will be $ 6.25 for the value addition of same $ 50, which is actually 12.5% of value addition.
GST is another name of VAT but it taxes both goods and services at the same rates. It eliminates many disputes which arises due to taxing goods and services seperately.
Goods Services Interchangeability
The main purose of GST is to eliminate the dispute of taxing goods and services separately. Nowadays services are sold with goods (e.g. warranty) and goods are sold with services (e.g. SIM card).
While our commonsense tells us that goods are services are totally distinct, in reality, you can sell all goods as services and evade taxes. For example, instead of selling a car (as goods), you can sell the car on lease for 10 years (as service) and save the taxes if service is not taxed or taxed at a lower rate.
GST is expected to eliminate all such disputes because all transactions shall be taxed at the same rate and no distinction is made between goods and services.
In earlier times, the tax was levied on the value of sales of goods (or even on services). It was simple but the problem was that Sales Tax will also be levied on the taxes which are already levied on the goods used for making the final product. For example, if you manufacture something for $100 using inputs of $ 50 and presume the tax rate to be 10%, you have suffered $10 on the final product plus you have suffered $ 5 on the inputs. In your case your value addition has been only $ 50. Hence the tax has actually become 30% rather than 10%. Even if you exclude the input tax, you end paying tax @ 20% on your value addition. If suppose your value addition would have been only $10, your sales-tax would have been same and effecitvely you had paid the sales tax @ 100%.
This is called cascading effect.
Hence the concept of VAT became more popular where you pay tax only on the value addition i.e. $50. This is achieved by giving you credit of $ 5 on inputs which you can use for making payment to your finished goods of $ 10. Hence you pay only the difference i.e. $5 which is exactly the 10% of value addition.
The true VAT can take place only when all goods and services are taxed at the same rate. This rarely happens in real life because there are always different tax-rates for different goods and services. Hence what you pay is always less or more than the % of value addition. For example, if suppose that half of the input in above example was taxed at 5%, your credit will be $ 2.5 + 1.25=3.75 and hence your payout will be $ 6.25 for the value addition of same $ 50, which is actually 12.5% of value addition.
GST is another name of VAT but it taxes both goods and services at the same rates. It eliminates many disputes which arises due to taxing goods and services seperately.
Goods Services Interchangeability
The main purose of GST is to eliminate the dispute of taxing goods and services separately. Nowadays services are sold with goods (e.g. warranty) and goods are sold with services (e.g. SIM card).
While our commonsense tells us that goods are services are totally distinct, in reality, you can sell all goods as services and evade taxes. For example, instead of selling a car (as goods), you can sell the car on lease for 10 years (as service) and save the taxes if service is not taxed or taxed at a lower rate.
GST is expected to eliminate all such disputes because all transactions shall be taxed at the same rate and no distinction is made between goods and services.
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