Sales tax is always a percentage of a product’s value which is charged at the point of exchange or purchase and is indirect. The different kinds of sales tax are retail, manufacturers’, wholesale, use, and value added tax.
Note: Sales Tax has been replaced by the Goods and Services Tax (GST) starting 1 July 2017.
What is Sales Tax?
The world survives and thrives on trade and governments across the globe have found a way to use trade to generate revenue. 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
A major reason for the growth and development of the country can be attributed to the taxes collected by the Government of India. India follows the system of a central union government at the Centre and state governments in each state. Each government chooses a taxation policy suited to its requirements.
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 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.
- Member (Income Tax)
- Member (Legislation and Computerisation)
- Member (Revenue)
- Member (Personnel and Vigilance)
- Member (Investigation)
- Member (Audit and Judicial)
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 FAQs
- What is the formula to calculate sales tax?
- What are the things I must keep in mind while calculating sales tax?
The formula to calculate sales tax is given below:
Total Sales Tax = Cost of item x Sales tax rate
Some of the things you must keep in mind while calculating sales tax are:
- Sales tax may vary from state to state. You will have to pay your sales tax depending on the state and the city in which you reside.
- If there are multiple items, the sales tax will be computed after adding the prices of all the items
- Sales tax will be calculated in percentage
The different types of forms issued by Sales Tax authorities are:
- Form C: Purchasing dealer can get goods at concessional rates from the seller on getting this form issued
- Form D: Issued to the buyer of the goods
- Form E1: This form needs to be issued by the dealer initiating the inter-state movement
- Form E2: This form is issued by the subsequent seller when goods move between states
- Form F: When the goods are sent to other states from one, this form will be issued
- Form H: this form is issued by the exporters for purchasing goods.
- Form I: this form needs to be issued by the dealers from Special Economic Zones
Sales price is the amount at which manufacturers sell their product to its customers. The sales price will consist of packaging charges, insurance charge (if applicable), and the sales tax paid by the manufacturer.
Inter-state sales is the movement of goods from one state to another for the sole purpose of selling the item to the customer.