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What is Sales Tax?

The indirect tax imposed on selling and purchasing of goods within India is referred to as Sales Tax. It is an additional amount paid over and above the base value of the product being purchased. This tax, usually imposed on the seller by the government, enables the seller to recover the tax from the purchaser. It is usually charged from buyers at the point of purchase or the exchange of some specific goods and is chargeable at a certain percentage of the product value.

Sales Tax is levied by the Central Government as well as State Governments. It is decided by the Central Government basis its tax policies. State Sales Tax laws vary between states.

Types of Sales Tax

Though countries across geographies have their unique Sales Tax policies, there are certain standard types of sales taxes that are applicable to most countries. They are:

Wholesale Sales Tax – Tax levied on individuals dealing with wholesale distribution of goods is referred to as Wholesale Sales Tax.

Manufacturers’ Sales Tax – Tax charged on manufacturers of some specific goods is known as Manufacturers’ Sales Tax.

Retail Sales Tax – Tax levied on sale of retail goods and directly payable by the final consumer is called Retail Sales Tax.

Use Tax – This is a tax levied on the consumer for goods bought without paying sales tax. This usually holds true when goods are bought from vendors who are not a part of the tax jurisdiction.

Value Added Tax – An additional tax levied by some central governments on all purchases is called the Value Added Tax.

Sales Tax in India

In India, policies regarding sales tax are governed by the Central Sales Tax Act, 1956. It lays down rules pertaining to tax laws that are binding on the sale and purchase of goods, as well as sales taxes chargeable by the central government. The Central Sales Tax on a particular product is paid in the state where it is being purchased.

Central Sales Tax

The following are some of the key features of the Central Sales Tax Act.

  • Lays down principles regarding the time of sale and purchase of goods

  • Enlists goods that have special importance for trade and commerce

  • Lays down regulations regarding charging, collection and distribution of taxes generated from interstate trade

  • Holds the final authority for settling interstate trade disputes

State Government Taxes

State Governments in India have the power to decide on Sales Tax policies as per their unique financial requirements. This explains the reason as to why sales taxes vary from state to state. States classify businesses dealing in the sale of goods under three heads - manufacturers, dealers and sellers. Each of them require certificates to operate legally.

Exemptions from Sales Tax

The following categories are exempted from State Sales Tax and are offered to overcome double taxation, or on humanitarian grounds.

  • Certain specific goods as per the list of goods that have been exempted by the state government

  • Products from sellers with valid state resale certificates

  • Products sold for the purpose of charities or educational institutions like schools

Sales Tax Calculation

Sales Tax rate applicable on a particular product can be calculated through a simple formula:

Total Sales Tax = Cost of item x Sales tax rate

While the formula is a simple one, sellers and manufactures need to consider the following while calculating Sales Tax on their goods:

  • It is calculated as a percentage

  • Be updated on the Sales Tax rate of the state and city that the manufacturer or seller belongs to, as it varies from state to state

Sales Tax Violations

Manufacturers and sellers need to be aware of some of the most common violations to prevent themselves from committing them. These are:

  • Providing inaccurate information while filling up the Central Sales Tax (CST) form

  • Failing to secure registration as mentioned in the CST Act

  • Not abiding by the security provisions mentioned in the CST Act

  • Misappropriation of goods bought at discounted rates

  • Registering with false identity

  • Collecting Sales Tax without securing the necessary registration

  • Furnishing inaccurate or false statements about purchased goods

Composition of Central Board of Direct Taxes

The Central Board of Direct Taxes is the administrative authority for levying and collection of sale taxes in India. It is a part of the Department of Revenue that is integral to the Ministry of Finance, and functions as per the Central Board Revenue Act, 1963.

The Central Board of Direct Taxes is composed of members who are assigned responsibilities across different departments like Income Tax, Revenue, Investigation, Legislation and Computerisation, Personnel and Vigilance, and Audit. The governing body is headed by the Chairman.

The Central Board of Direct Taxes is responsible for the following:

  • Formulate policies related to direct taxes.

  • Oversee administration of direct tax laws along with the Income Tax Department.

  • Investigates complaints and disputes related to evasion of taxes.

FAQs On Sales Tax

What is Sales Price?

Sales Price is the amount that the manufacturer or seller of goods earn on the sale of those goods. Packaging charges, incentives (if any), insurance charges (if applicable) and Sale Tax paid by the dealer are included as a part of the Sales Price. However, it does not include charges incurred during delivery, installation, cash discounts and return/exchange of goods by the purchaser.

What does inter-state sales mean?

Inter-state sales refer to the transfer of title documents of goods that are moved from one state to another, for the purpose of sale.

What is the process that I need to follow to be able to charge Sales Tax on the sale of my goods?

As a dealer, you have to be aware of the different forms that you have to fill up during various stages of transfer and movements of goods within and outside your state. Here is a list of the forms along with their individual purposes.

  • Form C enables the purchasing dealer to procure goods from the seller at discounted rates.
  • Form D is issued by the government department that is involved with the purchase of goods.
  • Form E1 is issued by the dealer who initiates the transfer of goods between states.
  • Form E2 is issued by the subsequent seller during inter-state movement of goods.
  • Form F is issued when goods are transferred to a state other than the one where they have been manufactured.
  • Form H is issued by an exporter who is interested in purchasing certain goods.
  • Form I is issued by dealers in SEZs or Special Economic Zones.

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