Excise vs. Vat

Difference Between Excise and Vat

All citizens in a country expect the elected government to operate in an effective manner and for this purpose there is a mandatory requirement of revenues for the government to shoulder its responsibilities. These revenues are generated through various taxes that are in the form of direct and indirect taxes. Income tax is a direct tax while Excise and VAT are indirect kinds of taxes and constitute the immensity of revenues taxes generated by the governments. Although there are several categories of items on which both excise and VAT are applicable, in general, excise is levied only on merchandise and goods manufactured, while VAT is levied on the sale of a product or service. Both excise and VAT are payable on the same goods. The Excise Duty is paid by the manufacturer while a vendor collects VAT from the end customer, who has to pay this to the seller.

Excise or Excise Duty is a tax which levied by the government on goods manufactured for sale in the country. It is varies from customs, which is a tax that an importer or buyer is required to pay when he imports merchandise from other foreign countries. Therefore, excise duty is an inland tax, as well as an indirect tax which means that the manufacturer sells it at a higher price than what was incurred on it while producing and thereby recovering the tax paid on its manufacture. Excise Duty is always in addition to the VAT which is required to be paid by the end consumer.

Let’s say, a manufacturer produces an item that cost him Rupees 100. He will have to pay the excise tax applicable on the product and later on he sells it to a vendor at a much higher price of say Rupees 120. The vendor, when he sells it, will collect the VAT from the customer. Both these taxes are therefore applicable on the same product.
VAT is the Value Added Tax and is sometimes referred to as consumption tax. It is paid by the buyer and not the vendor who has already paid the excise duty to the manufacturer. Yet, the vendor is required to pay the difference between these two amounts and is allowed to keep the rest of the amount to pay for the input tax he has already paid. VAT can be considered almost like Sales Tax in the sense that it is paid by the end customer.

However, it varies from sales tax in that it is collected only once in this chain from the end consumer. The VAT approach has put an end to the evasion of sales tax since it gives incentive to the seller, when he charges VAT from the end customer.

Both these taxes, the Excise Duty and VAT are indirect taxes that add to the exchequer of the government. Actually, Excise Duty and VAT form the bulk of the revenues generated by the government, although these two taxes are different.

In case, the manufacturer does not sell and uses the good himself, in these conditions, he does not have to pay any excise duty. Yet, if he sells it at a higher price, he has then to pay the excise Duty. VAT is not paid by the vendor, who buys the goods from the manufacturer but by the end consumer in the chain. The vendor has already paid excise duty to the manufacturer who deposits it with the Treasury.

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