Sales Tax in India

Sales Tax in India is an indirect tax. It is applicable on purchase and sale of goods within the country. The amount charges are paid over and above the product’s base value. Certain percentage of the goods value is chargeable for sales tax. Both central and state governments may decide the sales tax rate, and recover the tax from the purchaser. Thus, sales tax may vary from a state to state. The government may charge the same from purchasers at any stage of purchase or exchange of certain goods.

In this post, we will discuss sales tax regulations by the central government and state government, its types, exemptions, calculations, Central Board of Direct Tax, violations, and FAQs.

Central Sales Tax

Here are the features:

  • The centre sets the rules and principles for time of sale and purchase of goods.
  • It also details the goods that have more importance in trade and commerce.
  • The centre also has the final say in settling the disputes for interstate trade.
  • It may also put ahead regulations for charges, distribution and collection of taxes resulting from interstate trade.

State Government Taxes

Here are the features:

  • Even the state governments in India can decide Sales Tax policies according to their monetary needs.
  • This is why the sales taxes may differ from a state to another.
  • The states may categorize the businesses dealing with goods’ sales as that originating from dealers, sellers, or manufacturers.
  • Each of these liable taxable units need to have required certificates to operate business, legally in the country.

Types of Sales Tax

Here are the standard sales tax types:

  1. Wholesale Sales Tax: This is the tax applicable on individuals who undertake the wholesale distribution of goods.
  2. Retail Sales Tax: This is the tax on sale of retail goods. The final consumer is the one who directly pays this tax.
  3. Manufacturers’ Sales Tax: This is the tax applicable on specific goods. The same is payable by manufacturers.
  4. Value Added Tax: This is VAT, which is an additional tax applied by the central government on purchases.
  5. Use Tax: This tax is chargeable on goods purchases by the consumer without the payment of sales tax. This happens usually when the consumer buys goods from vendors who do not come under tax jurisdiction.

Sales Tax Exemptions

Certain categories do not have to come under the State Sales Tax. This is to get rid of the possibility of double taxation. And sometimes the reason for exemption is on the basis of humanitarian grounds. Following are the exemption information:

  • Specific goods according to the list of goods that are exempted by the state government.
  • Products sold to educational institutions or for the purpose of charity.
  • Products from sellers that come with valid state resale certificates.

Sales Tax Calculation

The rate of sales tax for a particular product is calculated based on the formula: Total Sales Tax = Cost of item x Sales tax rate/100. But when calculating the sales tax, the manufacturer/seller/dealer has to know what the calculation is as a percentage. And the person needs to keep updated with any change in the sales tax rate of the state/city of operation.

Here is an illustration of the sales tax calculation:

  • For instance, you purchase goods worth Rs. 200. Here, consider the sales component as 10% of the entire sales tax.
  • Thus, the total sales tax is: 200 x 10 divided by 100, which comes to Rs. 20.

Composition of Central Board of Direct Taxes

The administrative authority - Central Board of Direct Taxes (CBDT) is the one levying and collecting sales tax in the country. It comes under the Department of Revenue. Thus, it is also integral to the Ministry of Finance in India. This authoritative body functions on the laws directed under the Central Board Revenue Act, 1963. The chairman heads the governing body.

The CBDT has members who bear the responsibilities for different departments such as Revenue, Income Tax, Legislation and Computerisation, Investigation, Audit, and Personnel and Vigilance. This body is responsible for the following duties:

  • Lay down the policies for direct taxes.
  • Investigate disputes and complaints on the evasion of taxes.
  • Take control of direct tax laws and their administration with the Income Tax Department.

Frequently Asked Questions about Sales Tax in India

Here are the Sales Tax FAQs:

The Central Sales Tax, 1956 governs the sales tax. It contains rules for tax laws for the sale and purchases of goods. It also consists of sales tax that the central government charges. The CST for a specific product is paid on the purchase in the particular state, as per the tax law of the state.

You must know the different forms to fill at various instances of movement and transfer of goods within our outside dealer’s state. Here are the forms:

  • Form C is for the purchasing dealers to procure goods at discounted rates from the sellers.
  • Form D is provided by the government department that is a part of the purchase of goods.
  • The dealer issues Form E1 to facilitate transfer of goods between states.
  • The subsequent seller issues Form E2 at the time of inter-state movement of goods.
  • When the transfer of goods takes place from a state other than the one in which manufacturing occurs, then Form F is issued.
  • The exporter who is not interested in buying specific goods, then issues Form H.
  • The dealers in Special Economic Zones (SEZs) issue Form I.

To prevent instances of violations, sellers and manufacturers must be aware of similar instances that may occur, which are as follows:

  • Registration with a false identity.
  • Providing false and inaccurate statements about purchase of goods.
  • Not securing registration according to that mentioned in the CST Act.
  • Misappropriation of goods that one purchases at discounted rates.
  • Collection of sales taxes without making a valid registration.
  • Giving out inaccurate details in the CST (Central Sales Tax) form.
  • Not adhering to the security provisions as required by the CST Act.

The amount which a seller or manufacturer earns from the sale of goods constitutes the sale price. It also contains components such as incentives, charges for packaging and insurance, and the sales tax paid by the dealer. But it does not contain charges applicable during installation, delivery, exchange/return of goods, and cash discounts.

This relates to the title documents of goods’ transfers which are moved from a state to another for sale.