Sales Tax
What is Sales Tax?
Trade has formed an integral part of world history, shaping the world
into the form it is in today. It is hard to imagine a world without any
trading, be it of goods or services. It was this desire to trade that
led to countries embarking on voyages to find new trading partners,
eventually changing the entire demography of Earth.
The world survives and thrives on trade and governments across the
globe have found a way to use trade to fill their coffers. Sales Tax is a
form of tax paid to a governing body for the sale of goods and services. Sales tax is an indirect tax
and is generally charged at the point of purchase or exchange of certain taxable goods,
charged as a percentage of the value of the product. The sales tax
depends on the government in power and the individual policies enforced
by it, generally being simple to calculate and collect. In simple terms,
the sales tax is an additional amount of money paid while purchasing
goods or services.
Types of Sales Tax:
The concept of sales tax depends on the governing principles followed
by governments, but there are some universal sales taxes applicable in
most countries. The different types of sales taxes are mentioned below.
- Retail Sales Tax – This is a tax charged on sale of retail goods and is directly paid by the final consumer.
- Manufacturers’ Sales Tax – This tax is levied on the manufacturers of certain goods.
- Wholesale Sales Tax – This tax is levied on individuals who deal with wholesale distribution/sale of manufactured goods.
- Use Tax – This is a tax levied on the consumer for goods which are purchased without sales tax (generally from vendors who are not under the tax jurisdiction).
- Value Added Tax – This is an additional tax levied on all sales by certain governments.
Sales Tax in India:
India has emerged as a sound democracy has achieved great economic
progress compared to most countries. A major reason for the growth and
development of the country can be attributed to the taxes collected by
the Government. India follows the system of a central union government
at the centre and state governments in each state, with each government
choosing to follow a taxation policy to meet their demands.
Central Sales Tax Act, 1956:
The Central Sales Tax Act governs the taxation laws in the country,
extending to the entire country and contains the rules and regulations
related to sales tax. This Act allows the Central Government to collect
sales tax on various products. The Central Sales Tax
is payable in the state where the particular goods are sold.
Objectives of Central Sales Tax Act:
The Central Sales Tax Act was formulated with the goal to make tax
collection simpler and streamlined. The main objectives of CST Act are
highlighted here.
- Provide provision for levying, collection and distribution of taxes collected from sale of goods through interstate trade.
- Frame principles to determine when sale and purchase of goods occurs.
- Classify certain goods as being of special importance for trade and commerce.
- Be the competent authority to settle interstate trade disputes.
Sale Price:
Sale price refers to the amount payable to the dealer/trader in lieu
of the goods sold. It includes the cost of packing, insurance charges
(if any), incentives to attract buyers, and the sales tax paid by the
dealer. It does not include cash discounts, installation costs, delivery
costs and goods exchanged or returned by the buyer.
Inter State Sales:
Inter-state sales refer to sales which lead to movement or transfer
of goods from one state to another, achieved by transferring the title
documents while the goods are being moved.
Example 1: If an individual in Karnataka sells goods to a person in Maharashtra.
Example 2: If Ramesh from Telangana delivers goods
to Harish in Gujarat, who in turn sells it to Krishna in Bihar by
transferring the documents of title during the transfer of goods from
Telangana to Bihar.
CST Transaction Forms:
All dealers need to follow certain guidelines and give declarations
in prescribed forms to the buyer. Sales Tax authorities print and supply
different forms for various purposes, each form being listed below.
- Form C – This form allows the purchasing dealer to get goods at concessional rates from the seller.
- Form D – This is issued by the government department which purchases the goods.
- Form E1 – This is issued by the dealer who initiates the inter-state movement of goods.
- Form E2 – This is issued by the subsequent seller when the goods move from one state to the other.
- Form F – This is issued when the goods are sent to a different state.
- Form H – This is issued by an exporter for the purchase of goods.
- Form I – This is issued by dealers in Special Economic Zones.
State Government Taxes:
Individual State Governments have the power to levy sales tax to meet
their financial requirements. The sales tax in different states vary
for different products, with Value Added Taxes forming a big chunk of
state income. It is for this reason that certain goods are cheaper in a
particular state compared to another state. States categorize
individuals associated with sale of goods into manufacturers, sellers
and dealers, with each one needing certificates to work under the ambit
of the law.
Sales Tax Exemptions:
States offer tax emptions in certain cases, which can be humanitarian or to avoid double taxation.
- Sellers with genuine state resale certificates are exempted from tax when they resale products.
- Products sold to charities or schools are provided tax exemptions.
- There are a list of essential and local commodities which are exempted from sales tax.
Calculation of Sales Tax:
Sales Tax might seem like a complicated term to a lot of people and a
lot of us think that calculating it is extremely hard, if not
impossible. It is however far from the truth, as calculating sales tax
is no Herculean task if one gets the basics right.
Total Sales Tax = Cost of item x Sales tax rate
For Example: if Mr. Kumar purchases a box of
chocolates which cost Rs. 100 which have a sales tax component of 10%,
then the total sales tax paid by him becomes (100 x 0.10) = 10
Thus he pays a sales tax of Rs. 10 on the product.
There are a few points one needs to remember while calculating sales tax.
- Sales tax might vary from state to state and it pays to be informed of the rate in your particular state and city.
- Sales tax is calculated as a percentage.
- Add the prices for multiple items before calculating the sales tax.
Violation of Sales Tax Rules:
Taxes can sometimes be complicated and an individual might not
necessarily realise when he/she violates any provisions of the laws.
Here are some of the most common violations when it comes to sales tax.
- Providing false and misleading information in the forms.
- Failing to obtain registration according to the CST Act.
- Not following the security provisions mentioned in the CST Act.
- Misappropriation of goods purchased at discounted rates.
- Falsely impersonating a dealer or projection oneself as a dealer.
- Unregistered dealers collecting sales tax from consumers is a violation.
- Providing incorrect statements about purchased goods.
Central Board of Direct Taxes:
The Central Board of Direct Taxes is an apex body which is in charge
of administration of taxes in the country. It is a statutory authority
and functions under the purview of the Central Board Revenue Act of
1963. It is a division of the Ministry of Finance, working under the
ambit of the Department of Revenue.
Composition of Central Board of Direct Taxes:
The Central Board of Direct Taxes is composed of the following members.
- Chairman
- Member (Income Tax)
- Member (Legislation and Computerisation)
- Member (Revenue)
- Member (Personnel and Vigilance)
- Member (Investigation)
- Member (Audit and Judicial)
Functions:
The Central Board of Direct Taxes looks after all issues and matters
relating to the levy and collection of direct taxes in the country.
- It provides necessary inputs to frame policies for direct taxes .
- It is in charge of the administration of direct tax laws in collaboration with the Income Tax Department.
- Processes and investigates complaints related to tax evasion .
SALES TAX (Value Added Tax)
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VAT And Sales Tax Calculation in India
Taxation is the process of an authority levying tax on various goods,
services and transactions. Taxation is one of the foremost powers held
by the government, at the state as well as central level.
Value Added Tax or VAT
VAT is tax on consumption of goods and services which is paid by the
original producer when these goods and services are transferred to their
ultimate consumers. VAT forms an essential part of the GDP of any
country and as such is an extremely important type of tax. Every seller
of goods and provider of services charges VAT from customers which in
turn is paid to the government.
VAT is a multi-stage tax levied on the value added at each stage of production of goods and services.
Any person who makes an annual turnover of more than Rs.5 Lakhs by
supplying goods and services is supposed to register for VAT payment.
VAT is an indirect form of tax that is levied at various stages of
production of goods as well as services. VAT is imposed on imported
goods and local goods both. Since VAT is transparent and neutral, it has
emerged as a vital instrument of revenue for the government.
Main Features of VAT:
- Uniform rates are applicable to goods in the tax system. For example, televisions of a particular brand sold in West Bengal will have the same VAT as those sold in Himachal Pradesh unless controlled by the respective state governments
- VAT is levied at successive stages of production and distribution of goods and services
- It is collected at each stage of sale of goods and as such the end user does not need to pay the whole VAT amount
- VAT alleviates the cascading effect and as such related economic distortions
- VAT introduces fairness and uniformity in the process of taxation
- VAT ensures better tax compliance and reduces chances of tax evasion
- Transparency in sale of goods and services is encouraged by VAT
Calculation of VAT:
Before we start calculating VAT, let us know what exactly VAT is.
VAT = Output Tax – Input Tax
Output Tax is the percentage of selling price received by the seller on the selling of his final product.
Input Tax is the percentage of cost price paid by a buyer for raw materials required to produce his final goods or services
Suppose Ravi is a carpenter who bought wood for Rs.1000 and paid an input tax of 10% = Rs.100
Ravi made a wooden table out of the purchased wood and sold it for
Rs.2000. On this he collected an output tax of 10% on the selling price =
10% of 2000 = Rs.200
So, final VAT payable comes out to be Output Tax – Input Tax = Rs.200-Rs.100 = Rs.100
Sales Tax
Sales tax is levied on sale of goods and services which have been
produced or imported. If the same goods and services are re-sold without
any value addition, then sales tax is not levied again. Sales tax is
levied under the authority of both Central government as well as state
governments. This tax is levied basically on trading of goods within the
states. Works of contracts and leases are also liable to pay sales tax.
Features of Sales Tax:
- It is a form of consumption tax. This means that tax is collected when goods or services are actually purchased
- Easy to calculate as the tax amount is charged as a percentage of the final value of goods or services
- Compliance rate is average and sales tax is easy to collect
- Sales tax is collected by the seller from the buyer at the time of purchase of goods and services
- Sales tax is determined by states, cities and local municipal authorities and as such varies geographically
- Sales tax is collected completely by the end purchaser and the seller does not pay any part of it
Difference between VAT and Sales Tax
Although VAT and Sales tax are both parts of the taxation system in
India. There are several features that differentiate the two categories
of taxes. Here is a list of how these taxes are distinct from each
other.
- VAT is to be paid by both producer as well as consumer while sales tax is levied entirely on consumers
- Calculation of VAT is complex because of various layers of buying and selling transactions involved while that of sales tax is straightforward
- VAT is levied on various stages of production while sales tax is applicable on the final value of purchase
- VAT is able to avoid evasion successfully while sales tax is easy to fiddle with
- VAT model increases the cost of production to business which in turn can lead to a higher burden on purchasers whereas sales tax is easily handled
- VAT tends to profit the governments more rather than sales tax. This is because tax from each and every wholesale transaction also reaches the government unlike sales tax where just the end amount of tax is levied
Value Added Tax
Taxation refers to the process of an authority levying certain charges on goods, services and transactions. It is one of the foremost powers held by the government of any country. Various types of taxes are applicable at various stages of sale of goods and services; VAT is one such tax.What is Value Added Tax or VAT?
VAT is a kind of tax levied on sale of goods and services when these commodities are ultimately sold to the consumer. VAT is an integral part of the GDP of any country.While VAT is levied on sale of goods and services and paid by producers to the government, the actual tax is levied from customers or end users who purchase these. Thus, it is an indirect form of tax which is paid to the government by customers but via producers of goods and services.VAT is a multi-stage tax which is levied at each step of production of goods and services which involves sale/purchase. Any person earning an annual turnover of more than Rs.5 lacs by supplying goods and services is liable to register for VAT payment. Value added tax or VAT is levied both on local as well as imported goods.Features of Value Added Tax in India:
- Similar goods and services are taxed equally. So a similar television from all brands will be taxed the same
- VAT is levied at each stage of production and hence makes the taxation process easier and more transparent
- VAT reduces chances of tax evasion and fosters compliance
- Encourages transparency in sale of goods and services at the tiniest level
Calculation of VAT:
VAT is actually calculated as the difference between input tax and output tax.
VAT = Output Tax – Input Tax
Where output tax is the tax received by the seller for sale of his
goods and services and input tax is the tax paid by the seller for raw
materials required to manufacture his goods and services.
VAT Example:
Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials.
Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000
Now after selling the food made by using the purchased raw materials,
Ram was able to make Rs.1,00,000. Supposing 10% output tax, output tax
becomes Rs.10,000
So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000
Why is VAT required and How is it useful?
India was one of the last few countries to introduce VAT as a form of
tax. Taxation process in India was believed to be exploited the most by
businessmen and enterprises which had found loopholes for evading
taxes. VAT was introduced to minimize this evasion and render
transparency and uniformity to the tax payment process.
Value Added Tax is levied in multiple stages of production of goods
and services and comes under the purview of various state governments.
Hence, VAT in India might slightly differ from one state to another.
- No exemptions under the VAT system. Levying tax at each stage of the production process ensures better compliance and less loopholes to be exploited
- VAT, when enforced properly forms an important instrument for tax consolidation of the country and as such helps towards solving the fiscal deficit issue to some extent
- Since, VAT is a globally accepted taxation system, it will help India integrate better into global trade practices
VAT Implementation In Various State of India:
Since enforcement of VAT and collection of it comes under the purview
of state governments, different states have different VAT rules and
implementation guidelines. Hence, the procedure for tax implementation,
rates of VAT, timelines for VAT payment and VAT return filing, all
differ from one state to another.
Despite state-specific implementations, VAT in India can be divided into four main subheads.
- NIL VAT Rate: In a lot of states items that are very basic in nature are sold without levying any VAT on them. These items are mostly those sold by the unorganized sector in their most basic or natural form. Examples of this type of items are salt, khadi, condoms etc.
- 1% VAT Rate: For items which tend to be highly expensive, the percentage of VAT applicable needs to be kept low since otherwise the VAT levied could be too high an amount. For such items, VAT is kept as low as 1%. Gold, silver and other precious stones as well as precious jewelry fall under this category of goods. Most Indian states have fixed VAT for these items at 1% of the amount.
- 4-5% VAT Rate: A large number of daily consumption goods have been put by several state governments under this category of VAT. So VAT charged on goods like oil, coffee, medicines etc. is around 4-5% for most states in India.
- General VAT Rate: General VAT rates apply to goods which cannot be segregated and put under any of the above listed VAT categories. For goods like liquor, cigarettes etc. many governments charge high VAT rates of 12.5% or 14-15%. Also, many state governments follow a general rate of VAT for goods which cannot be categorized to suit the above classification. Such goods are taxed at 12%, 13% or even 15% in different states.
Process of VAT Registration:
VAT registration is mandatory for enterprises that make a turnover of
more than Rs.5 lakh by selling goods and services. All such enterprises
are required to register in their respective states of operation.
Registering for VAT is necessary for enterprises in order to start
paying VAT. On registration, each trader is given a unique 11-didgit
registration number which is used to for all communication regarding VAT
and its filing.
- Who should register for VAT? Any firm making a turnover of more than Rs.5 lakh per annum is required to register for VAT payment.
- Documents required for VAT registration: Following is the list of documents that needs to be submitted while registering for VAT.
- Copy of PAN card
- Address proof of business
- Proof of identity of promoters
- Additional security deposit or surety
- How much time does it take to register for VAT? Generally, state governments take around 15-20 days to complete the process of registration. This time may differ from one state to another.
Process of VAT Collection:
The process of collection of VAT can be safely categorized into two
broad heads based on the method of collection of value added tax.
- Account-based collection of VAT
Under the account based method of collection, sale receipts are not
used, instead tax is calculated on the value added. Value added is
calculated as the difference between revenues and allowable purchases.
Most countries do not use this method of computing and collecting VAT,
however, Japan still uses this way for tax collection.
- Invoice-based collection of VAT
Under the invoice-based VAT collection, sale receipts or invoice is
used to compute the corresponding VAT. Traders when they sell their
goods and services offer invoice containing separate details of VAT
collected. Most countries in the world today use the invoice-based
method of VAT collection.
Another way to categorize VAT collection is to classify it based on the timing of collection.
- Accrual-based collection of VAT Accrual based collection matches the revenue with the time period during which it is earned and matches the cost of raw materials and expenses to the time period during which they were made. This method is extremely complicated as compared to the cash-based collection of VAT. However, it also throws substantial light on information about any business.
- Cash-based collection of VAT Cash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash that is being handled instead of whether all the bills are paid. Whenever payment is received, that date is recorded as date of receipt of funds.
Why pay VAT when sales tax is already being levied by government?
VAT and sales tax work differently and hence are kept separate. While
sales tax calculation is an easy process, VAT is a multi-level and a
more complex form of tax. Sales tax is simply calculated as a percentage
of the final selling price of goods and services and is levied from
customers at the time of purchase of goods and services.
Some of the most striking points of differentiation between sales tax and VAT are listed below.
- VAT is levied from both producers of goods and services as well as consumers while sales tax is entirely levied from customers
- VAT is a complex taxation process because it is charged in multiple stages. Sales tax is a pretty straightforward and simple taxation procedure
- VAT is a multi-stage tax levied at each step of production while sales tax is charged from customers at final purchase of goods or services
- VAT places in a lot of checks and hence is more transparent and efficient while sales tax is easy to fiddle with
- VAT collection places more burden on producers of goods and services which they might ultimately charge from customers, leading to increased financial burden on customers
- VAT is more transparent and efficient as compared to sales tax and hence generates more revenue for the government than sales tax
VAT Returns:
VAT returns have to be filed by businesses that have an annual
turnover that is Rs.5 lakhs or higher. VAT is payable on all goods and
services that are domestic or imported. VAT returns can be filed
traditionally by filling and submitting the requisite paperwork to the
appropriate authorities. It can also be filed online if registered under
VAT Act 2003 using the provided user id and password.
Frequently Asked Questions about VAT:
- Does the VAT that I pay as part of any purchase reach the government? Yes. Respective state governments are responsible for collection of VAT which is then passed on to the central government.
- Why does VAT on my television set vary in Uttar Pradesh as compared to that in Karnataka? VAT is subject to rules and guidelines of the state government and as such may slightly differ from one state to another, even for similar goods and services.
- Is VAT levied on certain basic necessities like salt, oil too? No. Many state governments in India have done away with the concept of VAT for certain necessary goods.
- Is the compliance rate of VAT better than sales tax? Yes. VAT since levied at every stage of production offers less chances of loopholes which can be exploited and as such is better in terms of compliance as compared to sales tax which is pretty easy to fiddle with.
- Does VAT enhance the cascading effect in taxation process? No. Rather it minimizes the chances of cascading effect by levying the required tax amount at each and every stage of production.
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