Difference between Service Tax and Value Added Tax (VAT)

Key Difference: Service Tax is a tax that is levied by the government on any services that are rendered. Value Added Tax (VAT) on the other hand is a tax that is levied by the government for goods that are purchased. However, while the service tax is calculated on services, VAT is calculated on goods.

Government levies taxes, which citizens have to pay; this is the truth of life. However, the government charges so many different types of taxes that it can be hard to keep track of, especially for a layman. Hence it is often easy to confuse one tax with the other, which is why many people pay any and all tax, even if they may not have to, or worse don’t know about them at all and don’t pay, which can be punishable by law. Two such confusing taxes are the Service Tax and Value Added Tax (VAT).

Service Tax is a tax that is levied by the government on any services that are rendered. Technically, the tax is applied on the business itself, however, a clause in the law allows the business to collect the tax from its customers, which they usually do.

A Value Added Tax (VAT) on the other hand is a tax that is levied by the government for goods that are purchased. VAT is also known as General Sales tax (GST), and is a type of consumption charge. It is often levied on both imports and local products. However, there may be certain exemptions from the tax.  

Both Service Tax and Value Added Tax (VAT) are types of indirect tax. However, while the service tax is calculated on services, VAT is calculated on goods. Service Tax and VAT are what contribute the highest proportion of earnings to the government, that is in terms of taxes. Another difference between them is that service tax is fixed across all services and businesses, whereas VAT varies according to the goods in question, as well as the fact whether they are produced, or just sold. Also, service tax is calculated on only part of the cost, while VAT is calculated on the whole purchase price of the product.

Furthermore, in India, VAT is implemented by the State Government and hence varies in each state. While, the Service Tax is implemented by the Central Government and is uniform throughout the country.   

Comparison between Service Tax and Value Added Tax (VAT):

 

Service Tax

Value Added Tax (VAT)

Description

A government tax levied for services provided

A government tax levied for goods purchased

Type

Indirect Tax

Indirect Tax

Charged on

Services

Goods

Levied by

Levied by the Government

Levied by the Government

Calculated on

Calculated on only certain parts of the bill, not the whole bill.

Calculated on the purchase price of the product.

Charge

Fixed percentage

Variable, depending on the goods in question.

Image Courtesy: moneycontrol.com, studentsforliberty.org

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Comments

Hi, Both are indirect taxes ie the burden of which passes on to the ultimate consumer Service tax is levied on services (intangible )provided Ie architect, coaching classes, ola cab service etc whereas vat is levied on goods ( tangible ) sold Ie wood timber, electrical appliances etc . There are some goods which fall under both the category like work contractor , restaurant service etc. Service is governed by central law whereas vat is governed by respective state law .

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