In India, taxes play a crucial role in shaping the economy, with both businesses and consumers affected by the tax system. For years, the Value Added Tax (VAT) was in place, primarily taxing goods at the state level. However, in 2017, India introduced the Goods and Services Tax (GST), a more unified and transparent system that covers both goods and services.
This article compares GST vs VAT, highlighting their differences, how they work, and their impact on the Indian economy. We will also explore the recent U.S. tariffs on Indian goods and their influence on India’s tax system. By the end, you’ll understand which system benefits India more in today’s economic landscape.
What is VAT?
VAT (Value Added Tax) is an indirect tax that is applied at each stage of production or distribution of goods. In the end, it is the buyer (customer) who pays the full tax.
VAT was introduced in India on 1 April 2005, replacing the older tax system. VAT was collected by each state in India under its own guidelines, rules, and tax rates, which led to a lack of uniformity. VAT was applied only to goods, excluding services. VAT created a cascading effect, meaning tax was charged on tax.
What is GST?
GST (Goods and Services Tax) is a single indirect tax that replaces multiple taxes like VAT, service tax, and excise duty. GST was introduced on 1st July 2017 under the motto one nation, one tax. It is applied to the supply of goods and services and is intended to create a unified tax system across India. GST simplifies the tax structure by ensuring a seamless flow of credit and reducing tax cascading (tax on tax).
GST vs VAT
| ASPECT | GST | VAT |
| History | Introduced in India on April 1, 2005, to replace the old Sales Tax system. | Introduced on July 1, 2017, replacing multiple indirect taxes like VAT, service tax, etc. |
| Purpose / Objective | To replace the Sales Tax system and reduce the cascading effect of taxation | To create a unified tax system that merges various indirect taxes into one, aimed at “One Nation, One Tax“ |
| Compliance | Multiple VAT registrations required for each state a business operated in | Single GST registration per state via a central online portal |
| Coverage | Goods only; some essential goods like alcohol, fuel, electricity, etc., were (and still are) excluded | Covers almost all goods and services except alcohol, petrol, diesel, natural gas, and electricity – though there are plans to include them in the future |
| How it works |
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| Example | You buy a bottle of juice for ₹100, and the store adds VAT (12%), making the final price ₹112. | You buy clothes for ₹1,000 with GST (18%), and you can claim input tax credit, so the effective price you pay after credits may be lower than ₹1,180, depending on the GST paid earlier. |
Is VAT Still Valid in India?
VAT is still valid in India, but it’s only applicable to alcohol, petrol, diesel, and electricity.
Alcohol and electricity are state subjects, meaning each state has control over its tax rates for alcohol. Whereas for electricity, it was decided to keep it outside the scope of GST to avoid complications in state revenue.
Petrol and diesel are considered essential goods, and tax on them is important for both state and central revenue.
There have been discussions about bringing petrol, diesel, and alcohol under GST, but no concrete steps have been taken yet. The central government has indicated the possibility, but it would require consensus from states since it involves significant revenue changes for state governments.
Which is Better – GST or VAT?
GST is better than VAT as it offers a simplified, transparent, and integrated tax system. Unlike VAT, which was state-specific and complex, GST creates a unified system across India, replacing multiple taxes with a single one.
GST benefits businesses by providing seamless input tax credit and simplifying compliance through a single online portal. Consumers benefit from lower prices due to the elimination of tax-on-tax and a uniform tax rate across states.
GST is more efficient, transparent, and uniform than VAT, making it a better system for both businesses and consumers.
Trump Tariffs and International Tax Impact
The United States has recently imposed tariffs on India. On April 2, 2025, President Donald Trump announced a 27% “reciprocal tariff” on Indian imports.
Impact of Trump’s tariffs on India
- Exporters May Suffer: Indian exporters may face reduced demand in the U.S. due to higher prices on their goods.
- Higher Prices for Imported Raw Materials: The tariff could increase the cost of raw materials imported from the U.S., raising production costs for Indian industries.
- Impact on Indian Industries: Indian businesses could face challenges due to increased costs and may also see changes in their tax liabilities, as GST still applies to domestic transactions.
Impact on the Common Man
Trade tensions and the 27% tariff may lead to higher prices on goods made with imported materials, affecting everyday products. This could also slow down the economy, indirectly impacting jobs and income for the general population.
Trump Expands Tariffs: Who Else Is on the List?
- Colombia: In January 2025, a trade dispute erupted after Colombia blocked U.S. military planes from deporting Colombian nationals. In response, President Trump imposed a 25% tariff on Colombian imports and added sanctions. Key exports like oil and coffee were hit, affecting global markets. The issue was quickly resolved when Colombia agreed to U.S. terms, leading to tariff suspension.
- China: The U.S. imposed tariffs averaging 104% on Chinese imports (up from 34%), with some products facing rates as high as 125%. These tariffs have severely disrupted trade flows, with China now facing the highest U.S. tariff rates globally, intensifying the long-standing U.S.-China trade conflict.
- Japan: A 25% tariff was imposed on cars and car parts and 24% on other goods, causing Japan’s Nikkei stock index to fall by 7.8% and triggering an estimated 0.8% drop in GDP. Japan’s export-driven economy has been significantly strained, particularly in the automotive sector.
- South Korea: Faced with a 25% tariff, South Korea responded by offering emergency economic support to its auto industry. Rather than retaliate, the country has pushed for diplomatic negotiations to ease the economic burden.
- Israel: The U.S. imposed a 17% tariff on Israeli goods, prompting internal government discussions. Israel proposed removing its tariffs on American imports as a goodwill gesture, but the U.S. tariffs remain in effect.
- Singapore: Imposed with a 10% tariff, Singapore’s Prime Minister openly criticized the move, citing potential harm to global economic stability. Singapore opted not to retaliate, instead forming a task force to support businesses impacted by the tariffs.
- South Africa: Subjected to a 31% tariff, South Africa warned of manufacturing losses and job risks. The tariffs also nullified trade benefits under the African Growth and Opportunity Act (AGOA), prompting the government to diversify export strategies.
- Zimbabwe: Hit with an 18% tariff, Zimbabwe took a unique approach by removing all tariffs on U.S. goods in a bid to foster improved bilateral relations, making it the first country to do so in response to the 2025 tariff regime.
- Canada and Mexico: Both countries faced 25% tariffs, especially on steel and aluminum. However, some exemptions were provided for USMCA-compliant imports. The situation led to ongoing bilateral negotiations, with partial suspension of certain tariffs during talks.
Broader Economic Effects:
- The 2025 tariffs have increased U.S. federal tax revenues by an estimated $171.6 billion but at the cost of inflamed global trade tensions, consumer price hikes (notably on electronics like iPhones), and recession concerns in multiple economies.
- While some countries have retaliated, others have sought peaceful negotiations or policy adjustments to manage the fallout. These tariff policies have raised concerns over the fragmentation of global trade and a potential shift away from traditional multilateral trade systems.
- Trump threatens Denmark with tariffs over Greenland acquisition resistance,” as former U.S. President Donald Trump imposes economic pressure on Denmark after it’s refusal to allow the U.S. to acquire Greenland. This diplomatic tension highlights the strained relations between the two nations.
Conclusion
In conclusion, GST offers a more simplified and unified tax system compared to VAT, benefiting businesses and consumers by reducing tax complexities and ensuring lower prices. While VAT still applies to certain goods like alcohol and petroleum, GST’s broader coverage and efficiency make it the better choice for India. The recent U.S. tariffs on Indian goods highlight the importance of a robust tax system like GST, which can help navigate changes in international trade. The GST is a key driver for India’s economic growth and stability.
FAQS
What is the difference between VAT and GST?
VAT was a state-level tax applied only to goods, often leading to tax-on-tax. GST is a unified tax on both goods and services, eliminating cascading tax and simplifying the process.
Is GST the same as VAT?
No. GST replaced VAT by offering a more transparent, uniform, and efficient system that covers both goods and services across India.
What are the different types of GST in India?
GST includes CGST (central tax), SGST (state tax), and IGST (interstate tax), depending on where the sale happens.
How has GST impacted India’s economy since 2017
GST has simplified the tax system, improved compliance, boosted transparency, and supported the formalization of the economy, though small businesses initially faced challenges.
What impact do U.S. tariffs have on India’s economy and tax system?
U.S. tariffs can raise the prices of Indian exports and imported raw materials, increasing production costs and indirectly affecting GST revenue and consumer prices.
Is VAT still applicable in India after the introduction of GST?
Yes, but only on a few items like alcohol, petrol, diesel, and electricity, which are outside the scope of GST for now.
What is input tax credit under GST, and how does it work?
It allows businesses to claim credit for the GST paid on purchases, reducing their overall tax liability and preventing double taxation.
Why are fuel and alcohol excluded from GST?
They are major revenue sources for states, and including them under GST would require state approval, which hasn’t been achieved yet.
How has GST impacted small businesses in India?
GST increased initial compliance burdens but later helped streamline operations, improve input credit access, and expand market reach.
What is cascading tax, and how does GST eliminate it?
Cascading tax is tax on tax. GST removes it by allowing input tax credit at every stage of the supply chain, making the system more efficient.
