Goods and Services Tax (GST) is India's destination-based indirect tax on goods and services, with input tax credit that runs nationwide and a dual levy shared by the Centre and the states. Value Added Tax (VAT) was the state-level tax on goods that ran before July 2017, after replacing state sales tax from 2005, and it left central excise and service tax outside the credit chain. A shirt made in Ludhiana could attract central excise, Punjab VAT, and an entry tax at the next state border. GST replaced that stack with one credit chain from raw material to retail.
Difference between GST and VAT
| Feature | GST | VAT |
|---|---|---|
| Start | 1 July 2017, after the 101st Constitutional Amendment | State VAT from 2005, in place of sales tax |
| Rates | The GST Council, with the Centre holding one-third of the votes and the states two-thirds | Each state government set its own VAT rates |
| Threshold | ₹40 lakh for goods in most states, and ₹20 lakh for services | Set by each state, typically ₹5 lakh to ₹10 lakh |
| Movement | An e-way bill is mandatory for inter-state movement above the threshold | No single national e-way system |
| Coverage | Central excise, service tax, VAT, central sales tax, entry tax, and octroi, in most cases | VAT replaced state sales tax, and central excise continued on its own |
| Registration | One GSTIN for each state of operation | Separate registrations for VAT, excise, and service tax |
At a glance
Coverage
Goods and services
Goods only, with services under a separate service tax
Cascading
Reduced by nationwide input tax credit
Partial, because central and state taxes did not fully offset
Structure
Dual GST, as CGST, SGST, and IGST, with a GST Council
State VAT, plus separate central excise and service tax
Inter-state trade
IGST, with settlement to the destination state
Central sales tax, entry tax, and blocked credit
Example
Textile unit in Surat, before and after GST
Before GST, a Surat weaver paid excise on yarn and state VAT on fabric, and could not fully set the central tax off against the state VAT. Tax stacked at each stage. That stacking is the cascading effect. After GST, fabric can carry a single 12% GST, and input tax credit is available at every stage. A sale of sarees to Rajasthan is charged as IGST, in place of the old border taxes. The final consumer sees one tax. The firms in the chain claim credit on their inputs.
What this means for the exam
GST covers goods and services and allows credit across the chain and across states. VAT covered goods at the state level, and the offset between central and state taxes was incomplete.
GST
GST began on 1 July 2017 under the 101st Constitutional Amendment. The GST Council, chaired by the Union Finance Minister and including the state finance ministers, sets rates. The Centre has one-third of the votes and the states two-thirds. The design is destination-based: revenue accrues where consumption happens. Producing states worried about the loss of origin-based VAT, which is why the GST compensation cess ran from 2017 to 2022, with negotiations in the Council continuing after that.
The tax subsumed most central and state indirect taxes, including VAT, excise, service tax, and entry tax. It applies to goods and services. It is one system with several slabs, 5%, 12%, 18%, and 28%, decided by the Council. Logistics gained from fewer check posts, and collections became more buoyant as firms formalised, while small firms still face a heavy compliance load and the slab structure remains contested.
VAT
State VAT, from 2005, replaced state sales tax and applied to goods. Services stayed under a separate service tax, and central excise continued on its own. Credit between the Centre and the states was incomplete, so tax was charged on tax as goods moved through stages and across borders. Inter-state trade also faced central sales tax and entry tax. Thresholds varied by state and were typically ₹5 lakh to ₹10 lakh. There was no unified national e-way bill.
Within a state, VAT was largely origin-based. That is the shift GST made: the consuming state, rather than the producing state, is where the revenue is meant to land. A registration maze of VAT, excise, and service tax numbers gave way to one GSTIN per state of operation.
Key takeaway
GST taxes goods and services with credit across the chain, under a dual Centre-state model. VAT was a state tax on goods, and tax stacked because central and state levies did not fully offset.
Difference between GST and VAT FAQs
What is GST?
GST is India's unified indirect tax on goods and services, in force from 1 July 2017 under the 101st Constitutional Amendment. It is destination-based, with input tax credit across the chain, and rates are set by the GST Council.
What is VAT?
VAT was the state tax on goods that replaced sales tax from 2005 and ran until GST. It did not cover services, credit across central and state taxes was incomplete, and each state set its own rates and thresholds.
What is the main difference between GST and VAT?
VAT was a state goods tax with cascading and blocked inter-state credit. GST taxes goods and services together, allows credit nationwide, and splits the levy between the Centre and the states.
Does state VAT still run alongside GST?
No. GST subsumed most central and state indirect taxes, including VAT, central excise, service tax, and entry tax.
Does GST apply to services as well as goods?
Yes. Coverage of both goods and services, in one credit chain, is the design difference from VAT, which was a tax on goods. Services had their own service tax before 2017.
Is GST a single rate of tax?
GST is one system with several slabs, 5%, 12%, 18%, and 28%, set by the GST Council. The Council is chaired by the Union Finance Minister and includes the state finance ministers.
PYQ linkage
The GST Council is chaired by the Union Finance Minister and includes state Finance Ministers — correct?