VAT and Services Tax

VAT stands for value-added tax, which is a tax implemented by the Government of India over the goods and services provided by them. It is a ladder policy of taxation applied over several services as the amount requirement. The supply chain works in the process of adding the value or a particular amount over the goods and services from the initial stage to that of the final stage until it is delivered to the individual.

On the other hand, the Service tax is the taxes applied to the services provided by the government. These taxes came into existence as David postulated in the Finance Act 1994. They are termed as a degree of indirect taxes. However, the policy of GST, which came into existence in the year 2017, merged these value-added taxes, Service taxes, into a single entity, for easy and quick taxation.

Definition of Value-added Tax (VAT)

The Value-added tax is a tax on goods and services that are varied or levied at every step of the supply chain where the value of the tax is added, from its initial production to distribution and then to the end of the sale. The Value-added tax that the user pays on the cost of the product is less than any fee of material in the product that has been already taxed at his last position on stage.

On the other hand, GST stands for goods and service taxes, limited by the Government of India in the year 2017. GST is the combination of various indirect taxes like value-added tax, service tax, etc. GST was launched to improve the economic condition of the country.

How does Value-added Tax work?

The VAT is charged on the gross margin at every step in commercial enterprise, distribution, and marketing of an item. The tax is measured and collected at every step, different from a sales tax system. Here, the user pays the tax at the last stage or the end of the chain.

• Chocolate bars buy the raw material for, suppose, ₹100, adding ₹4 as tax implemented by the government on chocolate, which brings out the total of ₹104
• Then the product manufacturer sells the chocolate bar to a retailer for which he buys ₹100 and VAT, which is ₹10. Now the total comes to ₹110
• The product manufacturers render only ₹6, the total VAT minus the previous VAT that the provider charged for raw material
• Finally, the retailer sells the chocolate bar to the consumer for ₹200 and a VAT of ₹10, and the total is now ₹220
• The retailer renders 100 cents to Lexiya, the total Value-added tax at ₹20, minus the previous ₹10 VAT charged by the product manufacturer
• The ₹10 corresponds to 20% of the retailer’s gross margin on the Chocolate Bar

What is Services Tax?

Services tax is the tax imposed by the government of India on services provided by them or agreed to be provided, eliminating the services covered under the rejection list considering the “Place of Provision of Services Rules”.

The Services tax rules govern the person liable to pay Services tax. He may be a services receiver, provider, or individually made liable by the tax rule. It is an indirect tax, where the work provider collects the tax from the receiver of the work and pays the same to the government of India. Services tax was brought to light by the Finance Act in 1944 as various indirect taxes. People often get confused between VAT and service tax.

What are VAT and Services Tax differences?

VAT and Services Tax differences can be categorised in various ways, such as:

• Value-added tax(VAT) is the tax calculated or charged on the value addition to trade goods
• On the other hand, the tax levied on the services rendered is known as the Services tax
• Value-added(VAT) tax is a multipoint tax, while the Services tax is a single-point tax
• The Value-added tax is charged on the manufacturer and the trading commodities during the service
• ES tax is charged on the services provided
• The State Government levies the Value-added tax, while the central government levies the Services tax
• The area of Value-added tax is within the state
• In contrast, the area of Services tax is all over the country, subject to a specific exception

Conclusion

Both the Value-added tax and Services tax come under indirect taxes, as they are under the Central Board of Excise and Customs (CBEC) control. Nevertheless, the Goods and Services Tax GST has substituted VAT and Services Tax in India. 

The Services Tax has an even or flat rate, while the VAT rate differs from commodity to commodity. The jurisdiction on Value-added tax can be applied only within a state. In contrast, the jurisdiction of the Services tax is accountable all over the country except to specific subjects, Jammu and Kashmir.