Is VAT still applicable after the advent of GST in India? The answer to this question is YES!

The two taxes coexist in the Indian taxation system. Goods and services tax (GST) replaces service tax, central excise, state value-added tax (VAT), entertainment tax, octroi, etc. But, VAT is still applicable for alcohol, petroleum products, and entry tax.

Now, what is VAT and how did it come into existence?

VAT (value added tax) is a type of consumption tax. The Indian government applies it on the sale of goods and services.

The Indian Government had introduced this taxation system on the 1st of April in the year 2005. Gujarat, Rajasthan, Madhya Pradesh, Uttar Pradesh, Jharkhand and Chhattisgarh initially excluded themselves from the VAT, but later adopted it. Each state has its own VAT legislation, rates, taxable base, and taxable goods list.

Every commodity passes through various stages of production and distribution till it finally reaches the consumer. And a value addition is made to that commodity at each stage of production. The tax imposed on the gross sale price of a product at every stage of its production, distribution, and sale.

VAT isn’t paid by businesses — instead, it’s charged to consumers in the price of goods, and collected by businesses, making it an indirect tax. Businesses are then responsible for reporting it to the government.

For example, if a manufacturer sells goods to a retailer for Rs 100 with a 10% VAT, the manufacturer pays Rs 10 to the government. Similarly, when the retailer sells the goods to a consumer for Rs 150 with a 10% VAT, the consumer pays Rs 165. The retailer pays Rs 5 to the government after claiming Rs. 10 as the input tax credit.

How is it different from GST? 

Unlike the Goods and Service Tax (GST), the VAT is not uniform throughout the country, and it varies on a state to state basis. Each state also had different legislations on this tax which the businesses must adhere to at all costs.

Pros and Cons of VAT

PROS:

1. A VAT would close tax loopholes by replacing other taxes, such as income tax.
2. In comparison to a progressive income tax, VAT offers a greater incentive for people to earn more income.

CONS:

1. Businesses are faced with higher costs due to VAT.
2. There is a possibility that it can encourage tax evasion.
3. Passing along costs results in higher prices, especially for consumers with low incomes.

Can you get a refund in VAT? YES!

Application form

Get a Tax Refund Application Form from the retailer. You might also be asked to show your passport to check that you’re eligible.

Customs check

At customs, present your passport, VAT form(s), VAT invoice(s) and the tax-free goods.

Refund approved

If all the criteria are met, customs will approve your form. You’ll get a signed form that allows you to receive the refund.