What Is VAT For E-commerce Companies in India

If you’re the one who wants to add a digital channel for your brick-and-mortar store, there are a few things that you need to know before you can take the next step. Hopefully, you are aware of the various kinds of taxes that apply to online sales. Make sure that you know all about the taxes you’re supposed to pay.

One such type of tax structure for selling eCommerce goods in India is Value Added Tax or VAT. 

Now the Question Arises – What is VAT?

A special tax or VAT is added at every stage when a person purchases a certain kind of product from a store. This tax falls under the category of indirect taxes in India because it is paid through indirect means by the taxpayer (manufacturer or seller of goods & services) to the Government.

VAT levies on the multiple stages of production of goods and services and sale/purchase. In India, any person/manufacturer/seller who is earning more than Rs. 5.5 lakh annually by supplying goods and services is liable to pay the value-added tax or VAT. This tax is applied on both local as well as imported eCommerce goods and services.

How is VAT Calculated?

VAT is calculated based on two components.

• Output VAT
• Input VAT

VAT = Output Tax – Input Tax

Input VAT

Input VAT is added to the purchases made by the retailer or manufacturer. The VAT registered users are to be paid every month to the state government for most business purchases.

Output VAT

This tax is charged to the customer for a sale deal made by the retailer or manufacturer registered under the VAT provision. The seller of goods and services has to register for VAT to make the sales for a prescribed limit.

What is GST?

The Goods and Services Tax (GST) was implemented from 1st July 2017 and has replaced the Central and State indirect taxes such as VAT, excise duty, and service tax. 

How is GST Calculated?

The GST rates for most eCommerce goods come in the category of 5%, 12%, and 18%. In contrast, most of the services fall in the category of 18% GST.

There are currently Three Types of GST

• Central GST (CGST) – It applies to sales within the state and is submitted to Central Government.
• State GST (SGST ) – It applies to sales within the state and is submitted to State Government.
• Integrated GST (IGST) – It applies to sales outside the state and is submitted to Central Government.

The formula for GST calculation

GST Amount = Value of supply x GST%/100

Price Charged = Value of supply + GST Amount

The formula of when GST is included in the value of supply:

GST Amount = Value of supply – [Value of supply x {100/(100+GST%)}]

Benefits of GST Implementation Over VAT

Goods and Services Tax (GST) is a single, all-inclusive, and destination-based taxation concept in the entire country. GST has changed how tax is collected on eCommerce goods and services by eliminating the cascading effect of tax, simple tax filing procedures, and lesser compliance issues.

Old Method of Tax Calculation (VAT)

Suppose the handmade products are sold from Delhi to Mumbai at Rs. 1000.

VAT on the sold products is 10% of Rs. 1000 = Rs. 100. 

So the cost of the product sold from Delhi to Mumbai with the VAT is = Rs. 1100.

The Selling Price = Rs. 2100.

CST applied to S.P. @10% = 210.

Total Cost of the Product Sold Rs. 2100 + Rs. 210 = Rs. 2310. 

New Method of Tax Calculation (GST)

Now we will see how GST impacts the product pricing:

The price of the product sold from Madhya Pradesh to Maharashtra = Rs. 1000.

CGST applies to the product price @ of 5% = Rs. 50. 

SGST applies to the product price @ 5% = Rs. 50.

The cost of the product sold from Madhya Pradesh to Maharashtra with CGST and SGST = Rs. 1100.

So, the Selling Price of the Product is 2100. 

IGST @10% on CGST + SGST = 1100/10% = Rs. 110.

The total cost of the product sold is Rs. 2100 + Rs. 110 = Rs. 2200. 

So, GST tends to be more profitable for the retailers than the Value-Added Tax (VAT). 

Goods and Service Tax (GST) is more advantageous as your business investment grows. I hope now you understand what VAT is and the differences between VAT and GST.

E-commerce business owners should follow the Inter-State and Intra-State GST guidelines for seamless business operations in India. 

Get more information on how to file GST for your eCommerce business.