For any government to function effectively, it needs revenues to carry on with its responsibilities. These revenues are generated through taxes of various types that are categorised into direct and indirect taxes. While income tax is a direct tax, both excise and VAT are types of indirect taxes and constitute a bulk of revenues generated by the governments. While there are many categories of items on which excise and VAT are applicable, in general excise is levied on goods manufactured while VAT is levied on the sale of a product or service. Both excise and VAT may be payable on the same product. While excise is paid by the manufacturer, a vendor collects VAT from the end consumer who has to pay this amount to the seller.
Excise
Excise or excise duty is a tax levied by the government on goods produced for sale in the country. It is different from customs which is a tax that a buyer pays when he imports goods from other countries. As such, excise duty is an inland tax. This is an indirect tax which implies that the manufacturer sells it at a higher price than was incurred on production thereby recovering the tax paid on its manufacture. Excise is always in addition to VAT which is paid by the end consumer.
This can be illustrated with an example. Suppose a manufacturer produces something that cost him Rupees 100. Now he will have to pay the excise tax applicable on the product then he sells it to a vendor at a higher price, say Rupees 120. Now the vendor, when he sells it will collect VAT from the customer. Both these taxes are applicable on the same product.
VAT
VAT is the value added tax and is known as consumption tax. It is paid by the buyer and not the vendor who has already paid the excise duty to the manufacturer. However, the vendor has to pay the difference between these two amounts and is allowed to keep the rest to pay for the input tax he has already paid. VAT is almost like sales tax in the sense that it is paid by the end customer. However, it is different 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 evasion of sales tax as it gives incentive to the seller when he charges VAT from the end customer.
Difference between Excise and VAT
Both excise duty and VAT are indirect taxes that add to the kitty of the government. In fact, excise and VAT form a bulk of the revenues generated by the government. However, the two taxes are different.
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Excise is the tax levied on the manufacture of goods VAT is the tax levied on consumption of goods
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If the manufacturer does not sell and uses the good himself, he does not have to pay any excise duty. But since he sells it as a higher price, he has to pay the excise tax. VAT is not paid by the vendor who purchases 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 to the government.