Difference Between VAT and Service Tax

Value-added tax (VAT) is a tax levied on a product whenever value is added during its production or distribution, from manufacturing to the final sale. The consumer ultimately pays this tax.

Service Tax, on the other hand, is imposed on services provided rather than goods. The service provider is responsible for paying this tax, which is usually included in the service price.

Definition of VAT

VAT stands for Value Added Tax, which is a tax imposed on the value added to a product during its production and distribution. Businesses can claim an input tax credit for the tax already paid on the product at earlier stages, allowing them to offset the tax paid in previous stages.

The authority to impose VAT lies with the State Government, which is why it is applicable only to sales made within the state. For interstate sales, Central Sales Tax is charged. This tax is also called a multilevel tax because it is imposed at each stage of the supply chain, starting from raw material acquisition to the sale to the end consumer whenever value is added to the product. While the burden of VAT falls on the customer, it is the seller who pays the tax to the authorities.

Calculating VAT is straightforward: subtract the input tax from the output tax. Input tax refers to the tax paid on intrastate purchases from a registered dealer, while output tax is the tax applied to intrastate sales.

Over 160 countries worldwide have adopted the VAT system. In India, the VAT rate varies depending on the state. It is 0% for tax-free commodities, 1% for items like precious stones and jewelry, 4% for essential goods, 20% for luxury items, and 13. 5% for all other goods not falling into these categories.

Definition of Service Tax

The government charges a tax called Service Tax on services provided. Only the Central Government can impose this tax, which applies throughout the country except in Jammu and Kashmir. You can figure out how much tax you owe for services from the Point of Taxation.

Usually, the person providing the services is responsible for paying the service tax, but in reality, the cost is passed on to the person receiving the service. However, there are certain services where the receiver must pay the tax directly. This is called the Reverse Charge Mechanism. Additionally, there are services where both the provider and the receiver share the tax responsibility, known as the Joint Charge Mechanism.

In India, service tax was initially introduced by the Finance Act of 1994, following a recommendation from the Dr. Raja Chelliah Committee. Initially, it applied only to three services: stock broking, telecommunication, and insurance, taxed at a rate of 5%. Currently, the service tax rate stands at 14%, applicable to all services except those listed in the Negative List. The Negative List comprises specific services that are exempt from taxation.

Key Differences Between VAT and Service Tax

The major differences between service tax and VAT are as follows:

1. The tax placed on making and selling goods is called Value Added Tax (VAT), while the tax on provided services is called Service Tax.
2. VAT is a tax applied at multiple stages of production and sale, while Service Tax is only applied at a single stage.
3. VAT applies to tangible goods, like physical items, while Service Tax applies to intangible items, like services.
4. The State Government imposes the VAT, whereas the Central Government imposes the Service Tax.
5. The laws of individual states determine VAT regulations, while Service Tax regulations are established by the Finance Act of 1994.
6. VAT was implemented nationwide in 2005, while Service Tax was introduced in 1994.
7. The VAT rate varies depending on the category of goods, whereas Service Tax has a fixed, flat rate.
8. VAT is applied within the boundaries of a specific state, while Service Tax is applicable nationwide, except in Jammu & Kashmir.

Difference Between VAT and Service Tax

Conclusion

Both VAT and Service Tax are classified as indirect taxes, which is why they are managed by the Central Board of Excise and Customs (CBEC). However, Goods and Services Tax (GST) is slated to replace both VAT and Service Tax in India in the coming years, unifying them under a single Act.