The Goods & Service Tax (GST) in India replaced the Value Added Tax (VAT) and integrated all of the indirect taxes in India on July 1, 2017, into one single tax. The key benefit of it is that GST not only simplifies compliance but also eliminates the cascading effect of taxes. GST replaced the Value Added Tax (VAT) to help businesses foster a national market.

Despite their similarities, there are differences between GST and VAT, fundamentally in their structure, administration, and impact. In this blog, we will discover the key differences between GST and VAT to understand the benefits that GST brings.

What is VAT (Value Added Tax)?

Value-Added Tax (VAT)  is an indirect consumption tax that is applied to each step of the supply chain in which value has been added to a good. The producer of goods and services pays VAT, but it is the consumer who purchases the goods and services that finally pays the tax. This ensures that VAT is effectively a tax on consumption.

Example of VAT

Suppose a farmer sells wheat for ₹30 (including ₹3 in VAT). A baker takes the wheat and adds value by making bread from it at ₹70 (and pays ₹4 in VAT on the additional value he has added). The supermarket then buys the bread at ₹110 (and pays ₹3 VAT on the supermarket’s mark-up). So the Government receives a total of ₹10 in VAT.

Key Features of VAT

Introduced in	April 2005, replacing the sales tax
Scope	Applies to goods only. Services via a separate service tax.
Levied by	Central government
Rates	4-20%, based on the state
Input Credit	Intra-state only. No interstate relief.
Impact	Cascading added 10-20% costs for MSMEs

What is GST (Goods and Services Tax)?

Goods and Services Tax (GST) is a multi-stage, destination-based tax that is levied on the supply of both goods and services. It is an indirect tax that replaces many direct taxes, including VAT, excise duty, service tax, and more.

Example of GST

Suppose a furniture maker sells furniture worth ₹100,000. The GST levied on furniture in 2025 under the GST 2.0 reform is 18%. The GST amount on the sale will be ₹18,000, and the total value charged to the buyer will be ₹1,18,000.

Key Features of GST

Introduced on	July 1, 2017, subsuming VAT and 16 other taxes
Scope	Applies to goods and services under one system
Structure	The central government levies the central GST (CGST) on intra-state transactions The state government levies state GST (SGST) on intra-state transactions The central government levies Integrated GST (IGST) on inter-state transactions Union Territory levies UT GST on intra-UT supplies
GST Rates/Slabs	0%, 5%, 18%, 40%
Interstate	IGST and e-way bills for tracking
Compliance	Digital via GST Network (GSTN). GSTR-1/3B monthly/quarterly

Understanding GST vs VAT Differences in India

Here are the key differences between GST vs VAT you must know:

Aspect	VAT	GST
Full form	Valued Added Tax	Goods and Services Tax
Scope	Administered by the GST Council	Unified tax on goods and services
Basis	Origin-based (Where goods are made)	Destination-based (Where goods are consumed)
Administration	State-administered	Administered by GST Council
Tax Rates	Varies by state from 4%-20%	0%, 5%, 18%, 40%
Input Tax Credit (ITC)	Limited to interstate and goods only	Nationwide for goods and services
Compliance	Manual filing, state-specific deadlines	Digital filing via GST portal
Interstate trade	Checkpoints, Form C, physical barriers	IGST and E-Way Bills, No checkpoints
Filing	Multiple offline state returns	Single unified GST return
Cascading effect	Yes, adds 2-3% cost per state	Near zero via full input tax credit

Benefits of GST vs VAT for Businesses

Here are the key benefits of GST and VAT you must know:

Benefits of GST

• GST removes the tax on tax effect that was common in the previous system through seamless input tax credits.
• The system simplifies registration, filing, payments, and refunds, particularly for small and medium enterprises.
• GST guarantees the harmonisation of tax rates in the country regardless of the states. This standardisation promotes the ease of doing business and a level playing field in different regions.
• GST enables supply chain efficiency by cutting down delays and transportation expenses by 20-30% with the elimination of interstate checkpoints and the introduction of E-Way bills and IGST.
• GST lowers the expenses of manufacturers and exporters by subsuming a number of central and state taxes and providing full input tax credits. This increases their competitiveness in the global market.
• The strong IT infrastructure and the overall tax base under GST have enhanced tax compliance, minimised evasion, and enhanced revenue efficiency for governments.

Benefits of VAT

• VAT was a simple tax that was only imposed on goods at the state level, and this was easy to comprehend by businesses operating within one state.
• VAT allowed states to enjoy freedom in tax rates and collections, and as a result, states could design tax policies to suit regional economic needs.
• The difference in VAT rates between states enabled certain areas to utilise tax as a mechanism to enhance the competitiveness of local industry.
• VAT was a proven tax regime that had legal frameworks and compliance systems in place, which gave stability to businesses that were accustomed to the regime.

Impact on MSMEs and Small Businesses

Here is how the introduction of GST impacts MSMEs:

• Over 6.3 crores of MSMEs were formalised through GST, which contributes 30% to the GDP.
• GST has helped reduce the credit gap, as lenders (Banks and NBFCs) make decisions based on a company’s financial performance.
• Invoice discounting is being provided through the Trade Receivable Discounting System (TReDS); TReDS has provided financing of ₹4 lakh crore, all of which is linked to GST.
• Rural MSMEs received training on GST Ayakar Kendras for 5 lakh users.
• Sectors such as textiles/pharmaceuticals experienced tariff shock that was offset by the Emergency Credit Line Guarantee Scheme (ECLGS) extensions.
• MSMEs can use their GST returns to qualify for the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

The transition to GST is a milestone in Indian indirect taxes. Although VAT made the taxation of goods at the state level easier, it created loopholes in the form of fragmented rates, cascading taxes, and interstate trade barriers. GST addresses these shortcomings by establishing a single, national tax system that is applicable to goods and services.

It also makes it easy to qualify for a business loan. At DMI Finance, we offer business loans without collateral, security, or assets. Apply for a business loan and get up to ₹25 lakh to grow and expand your business.

Frequently Asked Questions (FAQs)

1. Are there still some VATs in use today in India?

The majority of VATs in India were abolished on July 1, 2017, as a result of the introduction of Goods and Services Tax (GST) for specific goods that are not covered under GST, such as liquor and petroleum.

2. What is the difference between VAT and GST when it comes to your business?

GST provides for a single point of compliance and allows for input tax credits that are seamless across states, which is approximately 40% cheaper than VAT.

3. What is the maximum GST rate now?

The highest standard GST rate is 40% which is imposed on “sin” and “luxury” goods such as tobacco under the 2025 reforms.

4. Can you claim Input Tax Credit (ITC) with GST?

Yes, registered taxpayers who are eligible may claim Input Tax Credit for business inputs based upon valid invoices and filing deadlines.

5. What are the key requirements for DMI Finance to provide business loans?

You must be at least 23 years old, have an annual income of at least ₹3 lakhs, a CIBIL score of at least 700, and have operated their business for at least 24 months with a valid GST number.

6. How is the scope of VAT different from the scope of GST?

VAT is applied only to the sale of goods within a state, whereas GST applies to all sales of goods and services nationwide.

7. To what extent does GST remove the concept of taxing tax (cascading)?

While GST has eliminated most of the cascading of taxes, there remains some residual effect of cascading through lapses in claiming input tax credits.

8. How does GST facilitate interstate trade compared to VAT?

GST replaces interstate checkpoints and form requirements with digital IGST and E-Way bills, reducing delays and transportation costs that VAT imposed.

9. Who administers GST and VAT?

GST is administered jointly by the Centre and States via the GST Council, whereas VAT was solely administered by individual states with different rules.

10. Why should you maintain accurate GST filings?

Maintaining clean GST filings is important because they confirm that you comply with all regulations regarding turnover and help speed up the process for loan approval from lenders.