Difference Between VAT & Sales Tax in India

by Fraser Sherman

India charges both sales tax and value-added tax, or VAT, on goods for sale. Consumers pay sales tax when they buy a product. Manufacturers and vendors pay VAT as they pass commodities through the supply chain.

Value Added Tax

The name of the value-added tax refers to the idea that as material changes ownership before the final sale — from raw materials to parts to wholesale, for instance — it increases in value. The Indian government says the amount of tax paid is based on the increase in value at each transfer of ownership.

The seller in each transfer charges the buyer the tax. Like companies that collect sales tax, the seller is responsible for submitting the tax to the government. Companies can claim a credit for the tax they pay on purchases and offset this against the amount they have to submit on sales.

The tax-consulting firm KPMG says companies must register to pay VAT whenever qualifying sales rise above the legal threshold. The threshold is set by each Indian state and ranges from $25 to $25,000 U.S. If goods cross state lines, the VAT threshold is zero.

Rates, according to KPMG, are set by states and also vary depending on the kinds of goods involved. Gold, silver, precious stones and items made from those materials are taxed at a low 1 percent rate, for instance. Some goods are VAT-exempt, including books, magazines, manual farm tools, fresh vegetables and sugar. A few items, such as gasoline, diesel, liquor and beer, are charged at 20 percent VAT or more.

Adding VAT at each stage increases the price of a product. Ultimately, this raises the price the consumer pays for the product, just as sales tax does.

Sales Tax

Sales tax in India is charged to consumers by sellers, who must register with the government to collect and submit the tax. The Indian government says sales tax applies to good and services, though food and drugs are exempt. Contracts and leases are subject to sales tax in some states.

Writing in 2015, the Wall Street Journal says of India that the sales tax system has become excessively complex. Different states charge different rates, and each state also taxes interstate sales. Paperwork can include dozens of forms, and truck inspections for sellable goods at state borders eat up shipping time. The government has proposed replacing the patchwork sales taxes with a national system, but the change can't happen until 2016 at the earliest.

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About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)