Indirect taxes are those taxes levied by intermediaries, such as businesses, and carried on to the ultimate consumer via pricing. In India, the two main indirect tax systems are Value Added Tax (VAT) and Goods and Services Tax (GST). VAT was levied at the state level on the sale of products, whereas GST is a comprehensive tax on supply of goods and services throughout India.
Understanding the difference between VAT and GST is important for taxpayers, businesses, and students because it shows how tax reform has impacted pricing, compliance, and credit availability. The distinction between VAT and GST also explains why GST consolidated several indirect taxes into a single structure.
Key Takeaways
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State governments imposed VAT on the sale of goods, and there were several state-specific rules governing this.
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GST replaced VAT in July 2017 and is applicable on both goods and services throughout India.
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VAT is still levied in India on certain products like fuel, diesel, and alcohol for human consumption.
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Under GST 2.0 (effective September 22, 2025), most services and goods are subject to 5% or 18% GST, with some luxury and "sin" goods subject to a 40% slab.
What is VAT?
VAT (Value Added Tax) is an indirect tax applied to the value added to products at each step of production or distribution. The VAT meaning refers to taxing only the extra value added by a seller. But in reality, this often resulted in tax on tax.
A manufacturer paid VAT on raw materials and then charged VAT on the finished products, with restricted credit availability. This resulted in a cascade effect, with tax paid on top of the already taxed value. Before the GST regime, state governments levied VAT on the sale of commodities inside their respective states. For example, if a wholesaler sold items to a store, VAT was applied at both phases, raising the ultimate consumer price.
Features of VAT
The structure of VAT regulated how tax was imposed, credits were permitted, and businesses were required to comply with state tax regulations. The primary VAT features are listed below:
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Multi-Point Taxation: VAT was imposed at all stages of the supply chain, including production, wholesale, and retail sales.
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Cascading Effect: Because input tax credit was not available across states or taxes, tax was levied on previously taxed values.
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State-Level Levy: State governments imposed and managed VAT separately under their individual VAT legislation.
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Non-Uniform Tax Rates: VAT rates varied by state and product category, resulting in pricing discrepancies.
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Limited Input Tax Credit: Credit was mainly limited to intra-state transactions and products, not services.
What is GST?
The Goods and Services Tax (GST) is an extensive indirect tax imposed on the delivery of goods and services throughout India. It consolidated several national and state indirect taxes, like VAT, excise duty, and service tax, into a single, unified tax structure. GST is destination-based, which means that the state collects tax income where the products or services are used rather than where they are created. In 2025, the GST Council rationalised GST rate slabs effective 22 September 2025.
GST is imposed at every level of the supply chain, but companies can claim an input tax credit (ITC) for the tax they pay on purchases. This guarantees that tax is charged exclusively on the value added, avoiding the cascading impact observed with previous tax systems. GST is levied on manufacturers, merchants, service providers, and e-commerce operators whose revenue exceeds certain levels.
Features of GST
The important GST features that every taxpayer and company should know are listed below:
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Destination-based Taxation: The state collects GST revenue where products or services are consumed, rather than where they are produced.
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Seamless Input Tax Credit (ITC): Businesses can claim credit for GST paid on inputs, input services, and capital goods, minimising the cascading impact.
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Dual GST Structure: GST is imposed in two forms. CGST and SGST on intra-state supplies, and IGST on inter-state supplies and imports.
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Digital Compliance via GSTN: GSTN ensures digital compliance by processing registration, payments, return filing, and refunds electronically.
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Threshold-based registration: GST registration is required only after exceeding certain turnover thresholds, providing aid to small businesses.
Also Read: What is (IGST)?
Key Difference Between VAT and GST
The difference between VAT and GST lies in how the indirect taxes are laid out, collected, and credited across the supply chain. Here are the primary distinctions between VAT and GST:
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Tax Base: VAT was levied solely on the sale of products, whereas GST is applied on both goods and services.
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Cascading Impact vs ITC: Under VAT, tax paid at one level was not always properly adjusted at the next stage, resulting in a higher final price. GST enables businesses to receive input tax credits for previously paid taxes, resulting in taxation based only on value added.
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State-Level vs National Tax: Individual state laws regulated VAT, resulting in varying regulations and rates. GST is implemented across India using a uniform national structure.
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Place of taxation: VAT was often collected in the state where the goods were manufactured. GST is levied at the state where the goods or services are consumed.
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Credit utilisation: VAT credit was restricted and mostly offered within the same state. GST enables broader use of tax credits across the supply chain.
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Compliance system: VAT compliance required separate registrations and filings in each state. GST registration, filing, and payment all take place through a single online system, GSTIN.
VAT vs GST – Tabular Comparison
Here is a side-by-side comparison to understand the difference between VAT and GST:
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Basis of Comparison |
VAT |
GST |
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Full form |
Value Added Tax |
Goods and Services Tax |
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Nature of tax |
Indirect tax; levied by state governments |
Indirect tax; levied jointly by the Centre and states |
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Coverage |
Only to goods |
Both goods and services |
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Tax structure |
Fragmented system with separate state laws |
Unified national tax system |
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Level of levy |
State-level tax |
Dual structure: CGST, SGST, and IGST |
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Tax base |
Sale of goods within a state |
Supply of goods and services |
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Cascading effect |
Present due to limited tax credit |
Eliminated through input tax credit |
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Input tax credit |
Restricted and not fully adjustable |
Seamless credit available across stages |
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Place of taxation |
Origin-based (tax collected where goods are produced or sold) |
Destination-based (tax collected where goods or services are consumed) |
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Tax rates |
Different rates in different states |
Mostly uniform rates across India |
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Compliance system |
Manual or semi-digital, state-specific |
Fully digital through GST Network (GSTN) |
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Registration requirement |
Separate registration in each state |
Single registration with state-wise details |
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Transparency |
Limited tracking of transactions |
High transparency with invoice-level reporting |
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Ease of doing business |
Complex for multi-state businesses |
Simpler and more consistent |
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Impact on prices |
Higher prices due to tax-on-tax |
Lower price build-up due to tax credit |
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Current status in India |
Largely replaced by GST |
Active indirect tax system |
Impact of Transition from VAT to GST
On July 1, 2017, India's indirect tax structure was significantly transformed by the shift from VAT to GST. The most significant benefit was the elimination of the cascading tax effect, which is the "tax-on-tax" issue. Businesses switched from maintaining state-specific VAT requirements to a single, centralised online filing platform, which reduced administrative costs.
Additionally, GST established turnover-based exemption limitations, letting small businesses that fall below the threshold operate without mandatory registration. Under VAT, goods that crossed state boundaries were subject to non-creditable Central Sales Tax, which broke the credit chain. After GST came in, it allowed for smooth input tax credit flow throughout the whole supply chain for both services and goods. This decreased effective tax costs and logistical expenses by eliminating interstate checkpoints and entrance charges.
The GST 2.0 revisions, which took effect on September 22, 2025, rationalised rate slabs by decreasing the number of rates and reduced taxes on several essential and consumer items. Items formerly taxed at 12% or 28% were reduced to 5% or 18%, making household necessities and durable goods more accessible. This promoted higher consumer spending, and e-commerce trade allegedly increased significantly following the revisions.
Which is Better: VAT or GST?
GST is fundamentally better than VAT, yet both are consumption taxes. VAT was exclusively applied to products at the state level, with rates ranging from 4 to 20% and managed individually between states. GST combined goods and services into a single tax system with standardised national rates (5%, 18, and 40%).
VAT continues to apply exclusively to goods exempt from GST, such as petroleum fuels and alcohol for human use. From a system design point of view, GST provides larger coverage, uniform compliance, and credit continuity than the previous VAT regime, whereas VAT is solely applicable for excluded industries under the present law.
Conclusion
The primary difference between VAT and GST lies in terms of scope, credit method, and tax administration. VAT was a state-level tax on products with little input tax credit and inconsistent laws between states. GSTN enabled a single, destination-based tax on goods and services, as well as seamless credit and digital compliance.
Subsequent revisions, such as the rate rationalisation in September 2025, have streamlined and decreased the complexity of the GST framework. While VAT continues to apply to certain items that are exempt from GST, GST remains the principal indirect tax structure that governs the majority of economic activity in India.
