When it comes to indirect taxation, VAT (Value Added Tax) and GST (Goods and Services Tax) are two of the most widely used systems globally. While both serve the same purpose – tax consumption, their structures, applications, and administrative processes can differ significantly from country to country.
This blog compares VAT vs GST, highlights how they’re applied in countries like France, Australia, and New Zealand, and compares their key advantages and drawbacks.
Is VAT the same as GST?
VAT and GST are the same in the sense that they are both consumption taxes.
The difference between GST and VAT tax lies in how they are applied.
What is VAT?
Definition of VAT
VAT, or Value Added Tax, is a type of indirect tax levied on the added value of goods and services at each stage of production and distribution. It is commonly used in the European Union and many other countries worldwide.
Unlike sales taxes, VAT is charged at every step of the supply chain, from manufacturing to retail, with businesses able to deduct the VAT paid on their purchases. This tax is typically administered by national or regional authorities, and its rates and rules can vary significantly between jurisdictions.
Application of VAT
VAT operates as a multi-stage consumption tax, charged at every point of the production and distribution process. Here’s how the system functions:
- Input VAT: This refers to the VAT paid by businesses when purchasing goods or services. It is deductible from the VAT they owe on sales, ensuring that the tax burden is only on the value added at each stage.
- Output VAT: This is the VAT collected by a business when it sells goods or services to customers. The net VAT payable is calculated by subtracting Input VAT from Output VAT.
- VAT Returns: Registered businesses must submit periodic VAT returns to tax authorities, detailing their input and output VAT to determine tax liabilities.
- VAT Registration: Companies that exceed a specific turnover threshold are legally required to register for VAT and comply with regular reporting and filing obligations.
What is GST?
Definition of GST
GST, or Goods and Services Tax, is a comprehensive indirect tax applied to the supply of most goods and services for domestic consumption. It replaces multiple indirect taxes such as service tax, VAT, and excise duties, creating a unified tax structure with standardized rates across the country.
GST is typically administered at the national level, ensuring consistency in tax application across regions. Countries like Australia, New Zealand, India, and Canada have adopted GST to simplify their tax systems. It is collected at the point of sale to the final consumer, making it more transparent and efficient than older tax regimes.
Application of GST
GST is a comprehensive, destination-based tax levied on the supply of goods and services. The following mechanisms form the core of how GST operates:
- Input Tax Credit (ITC): Businesses can claim a credit for the GST paid on inputs (purchases), which is then offset against their tax liability on sales. This ensures that tax is only paid on the value addition, not the entire sale amount.
- Destination-Based Taxation: One of the key differences between GST and VAT tax systems is that GST is collected by the state where the product or service is consumed, not where it originates. This principle promotes fair tax distribution.
- Tax Slabs: GST rates vary by product and service type, with slabs ranging from 0% (essential goods) to higher percentages for luxury or non-essential items. For example, the GST amount in New Zealand is 15%, applied uniformly.
- Compliance Obligations: Registered businesses must file regular returns, maintain transaction records, and adhere to compliance deadlines. Digital infrastructure often supports this process.
- Dual Structure (India-specific): Some countries, such as India, follow a dual GST model with CGST and SGST for intra-state, and IGST for inter-state This is different from countries like Australia and New Zealand, where GST is centrally administered.
GST/VAT in Australia
In Australia, the Goods and Services Tax (GST) is a 10% consumption tax applied to most goods, services, and digital products sold or consumed within the country. The same rate also applies to imports. Implemented in July 2000, the GST rate in Australia has remained steady at 10%, although the list of taxable goods and services has seen minor revisions over time.
Businesses and organisations registered for GST are generally required to:
- Include GST in the price of goods and services they sell
- Claim input tax credits for GST paid on purchases made for business use
This system ensures that GST is ultimately borne by the end consumer, while businesses recover the tax they pay on inputs.
If you’re wondering how to register for GST or claim GST credits in Australia, refer to this detailed guide.
GST in New Zealand
The Goods and Services Tax (GST) in New Zealand is a value-added tax applied to most goods and services consumed within the country.
The standard GST rate in New Zealand is 15%, covering the majority of taxable transactions.
A reduced GST rate of 9% applies to long-term hotel accommodation (stays exceeding four weeks).
On the other hand, zero-rated GST (0%) is applied to specific goods and services such as exports, certain financial services, land transactions, and international transportation. Some supplies are also exempt from GST, including certain financial services, residential rents, and the supply of fine metals.
To understand the process of GST registration and claiming input tax credits in New Zealand, refer to this blog.
VAT in France
France applies Value Added Tax (VAT) at varying rates depending on the type of product or service. The current VAT tax in France is structured into four main categories:
- Normal Rate – 20%
This is the standard VAT rate in France and applies to most goods and services that do not fall under a specific reduced rate. Items like alcohol and luxury goods are subject to this rate. - Intermediate Rate – 10%
Used for prepared food, catering and restaurants, non-processed agricultural goods, certain housing renovation services, passenger transport, firewood, admission to museums, zoos, fairs, and historic monuments, camping and waste treatment services, academic tutoring and support. - Reduced Rate – 5.5%
This rate applies to non-prepared food, electricity, gas, renewable energy sources, books, school canteen meals, equipment for people with disabilities, feminine hygiene products, social housing and energy-efficiency upgrades, live performances and certain cinema tickets, and import and delivery of artwork. - Super-Reduced Rate – 2.1%
Reserved for a narrow set of essential items, including reimbursable medicines and blood products, newspapers and press publications, sales of livestock and processed meat for consumption.
Category |
Description |
VAT Rate |
|---|---|---|
Food – Immediate Consumption
|
Prepared meals ready for immediate consumption (e.g. restaurants, cafés, fast food, bakeries, caterers)
|
10%
|
Food – Postponed Consumption
|
Packaged foods intended for later consumption, with expiry dates (e.g. supermarket items)
|
5.5%
|
Food in Restaurants (Special Cases)
|
Items like crisps, bottled water, canned drinks, and packaged fruit served in restaurants (meant for later consumption)
|
5.5%
|
Items consumed on-site like a glass of water or fresh juice
|
10%
| |
Luxury Goods
|
Jewellery, precious stones, caviar, tobacco, cocoa-based products
|
20%
|
Services – Standard
|
Haircuts, household work, childcare, medical treatments, travel agency services
|
20%
|
Services – Reduced Rate
|
Waste treatment, passenger transport
|
5.5%
|
Alcohol
|
Alcoholic beverages (≥1.2% ABV), Beer (≥0.5% ABV)
|
20%
|
VAT-Exempt Transactions
|
Exports, intra-community deliveries, teaching, banking, financial, and some medical services
|
0%
|
VAT vs GST: Which is Better?
Neither VAT nor GST is inherently better than the other. Both systems have their own set of advantages and drawbacks depending on the country’s economic structure, administrative capacity, and policy goals.
Here is a comparison of the pros and cons of both systems:
VAT Pros
- Encourages compliance through the input tax credit mechanism.
- Tax is visible at every stage of the supply chain.
- Tax is collected at multiple stages, reducing the chance of evasion.
VAT Cons
- Multiple rates and rules depending on region and product type.
- Tax-on-tax effect if input credits are not properly handled.
- High record-keeping and return filing at every stage.
GST Pros
- Simplified structure improves overall tax compliance.
- Uniform rates and centralised reporting improve transparency.
- Wider base and digital tracking reduce tax leakage and fraud.
GST Cons
- Requires complete migration from existing systems, which can be initially challenging.
- Eliminates cascading, but only if properly implemented.
- Heavy reliance on IT systems, requiring digital literacy and infrastructure.
Whether a country adopts VAT vs GST depends largely on its economic and administrative framework. Both systems aim to ensure fair tax collection and minimize evasion, but each has its own complexities. Understanding the difference between GST and VAT tax is essential for businesses operating across borders, especially in managing compliance, pricing, and tax planning effectively.