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What is commercial tax?

Commercial Tax, currently referred to as Goods and Services Tax (GST) in India, is a tax that is levied on locally manufactured and imported goods and services, and contributes to the GDP of the country. However, there are certain exclusions under commercial tax. Also known as consumer tax, it is not applicable on zero-rated goods, that is, food and certain drugs, or exported goods.

It is calculated incrementally, based on the appreciation or depreciation in the value of goods and service. It is a tax on goods and services that the government levies on the manufacturers and producers, who again levy it on customers or end users of these goods and services. It is a type of indirect tax because it is paid by the end user to the government via the manufacturer.

Till the implementation of the concept of GST (Goods and Services Taxes) in July 2017, taxes had to be paid across every stage of the supply chain, starting from the production, dealership and distributorship to consumers. All of the commercial taxes paid on certain goods or services at every stage of the supply chain was ultimately passed on to the end user or consumer– the buyer of those goods and services. This resulted in the cascading effect of taxes on consumers, that is, the payment of taxes that have already been made to the government in all the previous stages of the supply chain. Thus, GST was introduced to overcome this cascading effect. It serves as a single, unified tax for the multiple taxes like VAT, excise duty, and service tax.

The commercial tax varies between states in India because it is calculated and levied at the discretion of state governments. This multi-stage tax is applicable to every manufacturer who enjoys an annual turnover of more than Rs.5 lakh on the sale of goods and services.

Types of Commercial Tax

Commercial tax, which involves tax levied on sales, purchase and exchange of goods and services, is divided into the following types:

Consumption-based

All capital goods bought from other organisations are excluded from the tax base in the year of purchase. However, the value of depreciation is not deducted from the tax base in the subsequent years. The tax base is consumption because investments are excluded from taxation under Consumption type commercial tax. The term ‘commercial tax’ usually refers to the consumption type, since this is the most commonly used commercial tax.

Income Type

The tax base of this type of commercial tax includes capital goods bought from other organisations during the year of purchase. However, it does not include depreciation from the tax base in the following years. The tax reduces on consumption as well as on net investment. The tax base of Income Type commercial tax is the net national income.

Gross National Product (GNP) Type

Under the GDP type of commercial tax, capital goods bought by an organisation from another organisation cannot be deducted from the tax base in the year of purchase. Also, the deduction of depreciation from the tax base is not allowed in the following years. Levying tax is applicable on consumption as well as gross investment. As the name suggests, the tax base for GDP type commercial tax is the Gross Domestic Product.

Sales-based Commercial Tax

A Sales-based commercial tax is formed as a contingency, comprising of a certain percentage of the gross value of products and services over and above the final sale price. Sales taxes are a classification of indirect taxes because, as opposed to consumers paying taxes directly to the governing body, consumers pay taxes on the goods and services purchased from manufacturers, who again pay the same to the governing body.

Excise-based Commercial Tax

An excise-based commercial tax is levied on a certain category of products and services like cigarettes, fuel, alcohol etc. This enables manufacturers to pass on the tax burden to consumers purchasing these goods and services, making this an indirect tax.

VAT-based Commercial Tax

A VAT (Value-Added Tax) commercial tax or Value-Added Tax is calculated on the product or service’s net value, which acts as the tax base. It serves as a unified one-time payment to the relevant governing body as production, marketing and distribution charges.

Consumption-based Commercial Tax

A consumption commercial tax is levied on an individual as well as a collective basis. Also known as consumer commercial tax, these are incurred on the basis of the rate of purchase related to an individual product or service.

Business Commercial Tax

Business Commercial Tax applies to different businesses. In certain cases, this tax is determined by the nature of business, apart from the type of products and services. It is applicable on imported goods and products also.

Commercial Tax Department

Department of Goods and Services Tax belongs to the Ministry of Finance, Government of India. Every state in India has a Department of Goods and Services Tax. Each of them has been authorised with the responsibility of formulating and implementing regulations regarding levying, deciding that rate for different categories of goods and services, timelines for payments, return filing and collection of commercial taxes in their respective state.

The following is the structure of Department of Goods and Services Tax in their ascending order:

  • Commissioner of State Tax

  • Principal Secretary, Finance

  • Additional Chief Secretary, Finance

  • Minister of State, Finance

  • Finance Minister of India

Commercial Tax rates in different states

As discussed earlier, commercial tax varies between states across India. These taxes are levied basis the categories that they belong to. The usual rate of commercial tax for most categories is fixed at 12.5%. Despite the variations in the tax rates, commercial tax in India can be classified under four distinct categories:

Zero commercial tax

Goods manufactured or produced by the unorganised sector and sold in the most natural form like salt, condoms, khadi, etc. are exempt from commercial taxes.

Commercial tax rate of 1%

Expensive goods like jewellery made of good, silver and precious stones belong to this category and most states across India restricts the commercial tax rate for such goods to 1%. The reason behind fixing the rate of commercial tax is to prevent levying exorbitant rates on these goods.

Commercial tax rate between 4% and 5%

A wide array of consumable goods for daily use has been classified under this category by several states in India. some of these goods are medicines, coffee, oil, etc.

General VAT Rate

Governments charge a rate of 12.5%, and sometimes an even higher rate of 14% to 15%, for goods like cigarettes, liquor, etc. The commercial tax for goods that cannot be classified under the decided categories are taxed between 12% to 15%, as per decision of each state government.

As the commercial tax rates differ between states, it is important for manufacturers and producers to be well informed about the tax slabs on different categories of goods and services in different states to be complaint with the necessary regulations.

E-filing of Commercial Tax

Manufacturers can e-file their commercial tax through these simple steps:

  • Manufacturers and producers of goods and services who have registered their businesses for levying commercial taxes are assigned a User ID and Password by the Directorate of Commercial Taxes.

  • Once you have received these credentials, login to the official website of the Directorate of Commercial Taxes of your state. Remember to change the password to one of your choice for security purposes when by login to the portal for the first time.

  • Download the PDF version of the commercial tax returns filing form – From 14D.

  • Complete the downloaded form and related annexures with accurate details of your commercial tax receipts

  • Download the XML software from the online portal of the Directorate of Commercial Taxes of your state, if you don’t have your system, and then create an XML file of the completed forms

  • Upload the XML file, along with the filled-up annexures.

  • In case the system detects errors, you will be immediately notified, so that you can correct them immediately

  • On successful submission of your forms, you will receive an acknowledgement receipt. You can either download or print it for further reference as proof of e-filing of commercial tax.

FAQs

What is commercial tax in India?

A Commercial Tax, currently referred to as Goods and Services Tax (GST) in India, is a value-added tax that is levied on locally manufactured and imported goods and services, and contributes to the GDP of the country. However, there are certain exclusions under commercial tax. Also known as consumer tax, it is not applicable on zero-rated goods, that is, food and certain drugs, or exported goods. It is calculated incrementally, based on the appreciation or depreciation in the value of goods and services across every stage of supply chain, starting from the production, dealership and distributorship to consumers. It is a tax on goods and services that the government levies on the manufacturers and producers, who again levy it on customers or end users of these goods and services. It is a type of indirect tax because it is paid by the end user to the government via the manufacturer.

The commercial tax varies between states in India because it is calculated and levied at the discretion of state governments. This multi-stage tax is applicable to every manufacturer who enjoys an annual turnover of more than Rs. 5 lakh on the sale of goods and services.

What is VAT?

VAT (Value Added Tax) was one of the indirect taxes levied on the sale of goods, until it was replaced by Goods and Services Tax (GST). Though the idea behind VAT was introduced in 2005, it was finally implemented in 2014. There was a separate tax called Service Tax levied on services.

Till the implementation of the concept of GST (Goods and Services Taxes) in July 2017, taxes had to be paid across every stage of the supply chain, starting from the production, dealership and distributorship to consumers. All of the commercial taxes paid on certain goods or services at every stage of the supply chain was ultimately passed on to the end user or consumer– the buyer of those goods and services. This resulted in the cascading effect of taxes on consumers, that is, the payment of taxes on taxes that have already been to the government in all the previous stages of the supply chain. Thus, GST was introduced to overcome this cascading effect. It serves as a single, unified tax for the multiple taxes like VAT, excise duty, and service tax.

How to pay commercial tax online?

Manufacturers can e-file their commercial tax through these simple steps:

  • Manufacturers and producers of goods and services who have registered their businesses for levying commercial taxes are assigned a User ID and Password by the Directorate of Commercial Taxes.

  • Once you have received these credentials, login to the official website of the Directorate of Commercial Taxes of your state. Remember to change the password to one of your choice for security purposes when by login to the portal for the first time.

  • Download the PDF version of the commercial tax returns filing form – From 14D.

  • Complete the downloaded form and related annexures with accurate details of your commercial tax receipts

  • Download the XML software from the online portal of the Directorate of Commercial Taxes of your state, if you don’t have your system, and then create an XML file of the completed forms

  • Upload the XML file, along with the filled-up annexures.

  • In case the system detects errors, you will be immediately notified, so that you can correct them immediately

  • On successful submission of your forms, you will receive an acknowledgement receipt. You can either download or print it for further reference as proof of e-filing of commercial tax.

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