Basic Applicability of VAT

• VAT in India was applicable only on the sale and purchase of tangible goods within a state

• It did not cover services which were taxed under a separate central legislation

• VAT was implemented by individual state governments through their respective VAT Acts

• It functioned as a tax on value addition at each stage of the goods supply chain

• Services were entirely excluded from VAT’s scope and had a different tax treatment

Treatment of Services under Indian Tax Law

• Services were taxed under the Service Tax regime introduced through the Finance Act 1994

• Service tax was levied and collected by the central government on specified taxable services

• Businesses providing goods and services had to comply with both VAT and service tax provisions

• This dual system created complexity in transactions involving both goods and services

• There were common instances where invoices carried both VAT and service tax components

Examples of Dual Taxation Before GST

• In restaurants VAT was applied on food while service tax was charged on service elements

• Works contracts involved both VAT on materials and service tax on labor portion

• Software sales were often subject to VAT on packaged goods and service tax on licenses

• Leasing transactions attracted VAT on goods value and service tax on lease charges

• Telecom services attracted service tax while sale of SIM cards attracted VAT in some states

Issues Arising from Separate Tax Systems

• The distinction between goods and services often led to classification disputes and litigation

• There was no cross-credit mechanism between VAT and service tax leading to higher tax costs

• Businesses needed dual registrations separate filings and different invoicing formats

• The lack of harmonization resulted in compliance burdens and administrative inefficiencies

• Disputes between state and central authorities created confusion for taxpayers and professionals

Resolution Through GST Implementation

• GST was introduced on July 1 2017 to unify VAT and service tax under a single tax regime

• It eliminated the difference between goods and services by taxing both under one law

• Businesses now use a single GST registration return and invoicing system across supplies

• Input tax credit is available seamlessly for goods and services under GST reducing costs

• The move to GST resolved the dual tax burden and improved tax efficiency nationwide