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After the Goods and Services Tax was introduced in India in 2017, the country’s tax system experienced a major shift, as it replaced several indirect taxes.
However, Value Added Tax (VAT) still exists on some products, even with the existence of GST on others. Let’s look into this.
VAT is a state-level tax applied to sales of goods. Before GST, it applied to almost all goods. Now, it is levied on some specific products like alcohol, petroleum and electricity.
Goods and Services Tax (GST) is a unified nationwide tax that covers most goods and services. It currently has four slabs: 5%, 12%, 18% and 28%.
The centre is planning to implement new GST rules by Diwali this year. The proposed structure includes only two slabs: 5% and 18%. You can check out more details below.
VAT is applied to products on which GST isn’t applicable, like alcohol for human consumption, petroleum products like petrol and diesel, and electricity.
GST is applied on food items, clothing, electronics, household goods, services, entertainment, travel and luxury products.
Essential goods and services attract lower GST, whereas luxury and sin products fall under higher slabs. Under the new GST reforms, demerit goods might now attract 40% GST.
VAT is controlled by the states, and acts as one of their major revenue sources. States can adjust VAT rates as a tool for economic policy, like attracting investment.
Alcohol for human consumption is deliberately excluded from GST to allow states to retain control over their taxation.
Dine out bills often show both VAT and GST. That’s because food and non-alcoholic beverages fall under GST, while alcoholic beverages remain under VAT.
Industrial alcohol used in factories, labs, fuel and pharma is taxed under GST. Industrial alcohol includes denatured spirit, ethanol, rectified spirit and extra neutral alcohol.
On petrol and diesel, both central excise duty and state VAT are applicable. Meanwhile, electricity is exempt from GST but is taxed under VAT.
While state governments adjust alcohol and fuel taxes for revenue purposes, VAT on electricity is regulated and fixed on the basis of the cost of power, transmission and distribution, and subsidies.
This hybrid tax system in India allows for states to retain fiscal autonomy and revenue diversification, along with policy flexibility for both states and the centre.
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