Sales Tax: Types, CST, Calculation, Example & Exemptions

What is Sales Tax?

Sales tax is an indirect tax levied on the sale of goods and services. It is imposed and charged by the government of the nation. The sales tax is included in the price of the product and is collected by the seller on behalf of the government, who later is liable to pay that amount to the government. In the system of sales tax, the tax incidence and tax impact fall on two different persons. In simple words, the actual burden of tax (tax incidence) is born by the consumer of the product, but it is collected from the seller (tax impact). Like any other tax, sales tax is a source of revenue for the government and funds various projects of the government.

Geeky Takeaways:

• Sales tax is a compulsory payment made to the government indirectly via the seller on purchasing goods or services.
• Sales tax is included in the final price of the product sold or purchased.
• The real tax burden is borne by the consumer, while the tax is paid to the government by the seller. This means tax impact and tax incidences fall upon two different persons.
• There are different types of sales tax, Retail and Wholesale Sales Tax, Central Sales Tax (CST), and Value Added Tax (VAT). However, sales tax has been replaced by Goods and Services Tax (GST) in India since 1st July 2017.
• Sales taxes are implemented at various levels of government including, local, state, or national levels, and may differ from country to country according to the taxation policy of the country.

Types of Sales Tax

The type of sales taxes imposed vary according to the taxation policy of the government. However, different types of sales taxes include:

1. Retail Sales Tax: Retail Sales Tax is imposed on goods sold by a retailer to the customer directly. It is charged on the final sale of the product.

2. Manufacturers’ Sales Tax: Manufacturers’ Sales Tax is charged on the manufacturer of certain goods and services. Although the tax amount paid by the manufacturer is recovered by the customer by adding it to the final price of the goods.

3. Wholesale Sales Tax: Wholesale Sales Tax is levied on goods and services sold by a wholesaler to the retailer or sometimes to the customer directly.

4. Use Tax: Use Tax is paid by the customer for using those goods that are purchased without sales tax. This tax is paid to the state government of the state where the goods have been used. These goods are generally purchased from those vendors who do not fall under the tax jurisdiction.

5. Value Added Tax (VAT): Value Added Tax (VAT) is levied at each stage of production and distribution and is known as multi-stage tax. The amount of tax burden is shifted to the ultimate consumer of the product.

Sales Tax in India

Before 2017, in India sales tax was imposed on the sale and purchase of goods and services at the local, state, and central level under the Central Sales Tax Act, 1956. But, on 1st July 2017, India witnessed the greatest tax reform with the introduction of the Goods and Services Tax (GST). Goods and Services Tax (GST) is an indirect tax levied throughout the nation on the supply of goods and services. It is based on the concept of “One Nation-One tax”. GST aims to eliminate the cascading effect of multiple taxes. Under GST the tax rate varies depending on the category of the good or service.

Central Sales Tax Act, 1956

Central Sales Tax Act of 1956 administers the taxation on the sale of goods, extending to the entire country. It levies the rules and regulations related to sales tax in India. Under the CST Act of 1956, the taxes were collected and distributed by the state government where the sale took place. However, with the introduction of GST, the Central Sales Tax Act, of 1956 became ineffective in 2017. Key Components of Central Sales Tax Act, 1956:

1. Objective: The object of the CST Act was to impose and collect taxes on the inter-state sale of goods in India.

2. Authority: The CST Act authorizes the Central government to levy taxes on inter-state trade or commerce.

3. Administration: Taxes were imposed by the central government, but were collected and distributed by the state government of the state where sales took place.

4. Taxation Principles: The act levies down the principles to determine when the sale and purchase of goods take place, rates, and category of special goods, etc.

Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT) is a government body functioning as a part of the Ministry of Finance in India. It aims to manage the revenue of the government generated through direct taxes like Income Tax, Corporate Tax, Wealth Tax, and Capital Gains Tax. It plays a vital role in ensuring the effective administration and collection of direct taxes and formulating the policy and procedures for tax administrations.

What is Sale Price?

The sale price is the final price of the goods that is paid by the customer. It is the price calculated after applying all the discounts and reductions (except cash discount) and is always lower than the original price of the goods. It includes packaging costs, insurance costs, and sales tax paid by the seller.

What is Inter-State Sales?

Interstate sales refer to a sale where goods or services are transferred from one state to another within the same country. This means that the buyer and the seller are located in different states and goods are moved from one state to another. Interstate sales are subject to specific regulations and taxation policies as they involve the transfer of goods from one state to another. For Example, Rahul a dealer from Bihar sold goods to Ravi from Bengal as an Inter-State Sales.

Central Sales Tax (CST) Transaction Forms

In India, various CST transaction forms are prescribed for interstate sales and transactions. The following table highlights such CST forms along with their purpose:

Form Name	Purpose
Form C	Form C allows to claim a concessional CST rate on the purchase where goods are sold to a registered dealer in another state.
Form D	Form D is used to claim exemption from CST on purchases made by Government Department
Form C-D	Form C-D allows the subsequent buyer to claim an exemption or concessional rate of CST in the case of high-seas sales.
Form E-I	Form E-I is used to claim exemption from CST on the first sale of goods in another state, provided the buyer is a registered dealer.
Form E-II	Form E-II allows exemption from CST on subsequent sales of goods in another state, provided the buyer is a registered dealer.
Form F	Form F is used for CST transactions where goods are sold to a branch of the same company located in another state and used for stock transfers between different states.
Form H	Form H is used for claiming exemption or concessional rate of CST on interstate sales related to export transactions.
Form I	Form I allows for the concessional rate of CST on interstate sales to SEZ units or developers.

State Government Taxes

State governments in India impose sales taxes on different goods to generate revenue for funding public services, infrastructure development, and other governmental expenditures. The rate of sales tax for a particular product may vary from one state to another and so, the price of that product is different in different states within the same country. Some examples of taxes charged by state government are Sales Tax/VAT (Value Added Tax), excise tax, property tax, etc.

Sales Tax Exemptions

Certain goods or services are not subject to sales tax, either partially or entirely under the CST Act. Goods Exempted under sales tax are:

1. Essential Goods: Goods of necessities such as food, medicine, and clothing are exempted under sales tax to keep them under the affordable range.

2. Charitable Motive: Purchases made for charitable, educational, or religious activities are subject to exemptions.

3. Government Purchases: Purchases made by Central, state, or local government entities for official use may be exempted from sales tax.

4. Resale Exemption: Goods purchased by any business entity with an intention of re-selling shall be eligible for tax exemption under sales taxes to prevent double taxation.

5. Agricultural Inputs: Items like seeds, fertilizers, and equipment used in farming activities may be exempt from sales tax to support agricultural activities.

6. Healthcare Services: Some states may exempt healthcare services and medical supplies from sales tax to make them affordable for all classes.

7. Export Sales: Exemptions may apply to goods or services sold for export to promote international business.

8. Educational items: Educational materials, textbooks, and training services are exempted to support learning and development programs.

Calculation of Sales Tax

Calculation of sales tax seems to be complex and complicated, but it can be calculated in a few steps including:

1. Identify the Sales Tax Rate: A rate of sales tax varies from state to state, so it is important to ascertain the correct rate of sales tax under that jurisdiction.

2. Calculate Sales Tax: After determining the correct rate of tax, the amount of sales tax can be calculated using the following formula:

Sales Tax Amount = Sales Tax Rate × Price of Item

3. Ascertain Final Price: After determining the amount of sales tax, the final price of the good including tax can be calculated as:

Final Price = Price of Item + Sales Tax Amount

Let’s take an example for better understanding. Suppose Rahul (Mumbai) bought goods worth ₹1,00,000 from Wasim (Hyderabad). The sales tax applicable is 10%. now;

Sales Tax Amount = 0.1 × 1,00,000 = ₹10,000

Final Price (including tax) = 1,00,000 + 10,000 = ₹1,10,000

Violation of Sales Tax Rules

Some common violations of sales tax rules include:

• Failure to obtain a sales tax license.
• Failure to collect or remit the sales tax.
• Presenting misleading sales volume.
• Manipulating product details to misclassify goods or services.
• Non-compliance with filing requirements.
• Engaging in fraudulent practices like presenting false and misleading documents, collection of sales tax by an unregistered dealer, etc.

Conclusion

Sales Tax is an indirect tax that is collected and remitted through the seller but is borne by the customer. However, due to its cascading effects sales tax in India has been replaced by Goods and Services Tax (GST) which eliminates the drawbacks of sales tax. Under the concept of sales tax, each state had its own jurisdiction which created lots of confusion among the taxpayers.

Sales Tax – FAQs

Who is responsible for paying sales tax?

In most cases, the seller is responsible for collecting and remitting sales tax to the appropriate taxing authority. However, buyers are ultimately bearer of the tax.

What items are subject to sales tax?

The items subject to sales tax vary by jurisdiction but generally include tangible personal property such as clothing, electronics, and furniture and certain services.

What is a sales tax permit?

A sales tax permit, also known as a seller’s permit or sales tax license, is a document issued by a state taxing authority that allows a business to collect sales tax from customers.

What are the consequences of not paying sales tax?

Failure to collect and remit sales tax as required by law can result in penalties, fines, and interest charges imposed by taxing authorities.

Are there any exemptions or exceptions to sales tax?

Yes, there are often exemptions or exceptions to sales tax for certain goods, services, or transactions. These exemptions vary by jurisdiction but may include items like groceries, prescription medications, purchases by nonprofit organizations, and sales made for resale.