DIFFERENCE BETWEEN VAT AND SALES TAX IN INDIA

Difference Between VAT & Sales Tax in India

Value added tax and sales tax are a source of revenue for India's government.

The purpose of a taxation system is to enable the state treasury of a country to provide basic services and certain amenities to its people. India, as a nation, has a well-organized tax structure which is managed by two federal bodies: the Central and State Governments. Taxes are provisioned and implemented as per the Constitution of India, with the main being Customs Duties, Income Tax, State Excise, Stamp Duty, Service Tax, Entertainment Tax, Sales Tax and VAT (value added tax). VAT and sales tax are primarily levied as a source of revenue for the government.

1.   Characteristics

o    VAT is an indirect tax that is imposed on each stage of production of an item. It is reflected in the final price of an item, which is usually more than its cost of production.

Sales tax is a direct tax that is levied on a the price of a finished product, or service, and imposed on a buyer.

2.   Mechanism

o    VAT is calculated by subtracting the cost of output from the value of output. This can be written as: VAT = Value of Output -- Cost of Output.

VAT can also be calculated by subtracting the input tax from the output tax, or VAT = Output Tax -- Input Tax.

Sales tax is calculated by multiplying the current tax rate with the cost of an item, or Sales Tax = Tax Rate x Cost of an Item.

3.   Types

o    India's main types of sales tax are retail sales tax, luxury or selective sales tax, general sales tax, gross income tax and gross receipts tax.

According to James M. Bickley in the book "Value Added Tax," the main types of VAT include consumption VAT, gross product VAT and income VAT.

4.   Benefits

o    According to Alan S. Blinder in the book "The Economics of Public Finance," sales taxes are easy to administer, convenient to pay, preserve incentives, reach the fluid population (tourists, commuters and others on the move who typically evade income tax and other direct taxes due to their transient state), harmonize fiscal objectives by controlling extravagance to a certain degree, are correlated with progressive income tax and contribute to the government."

According to Dinesh Maidasani in the book "Straight to the Point - Tally 8.1," the VAT is a fairly straight forward tax that was implemented to reduce the complexities associated with the sales tax system. VAT is transparent, simple, flexible, equitable, fair and provides some revenue to India's government as compared to sales tax.

5.   Drawbacks

o    According to Blinder, sales taxes are regressive as they tend to burden poorer and larger families more heavily than richer and smaller families; and heighten deflation and depression in periods of financial crisis and unemployment.

VAT is often difficult to administer from business and administrative perspectives; and has a higher negative impact on labor intensive businesses as compared to capital intensive businesses.