Sales Tax in India, VAT + CST

[Munim Team]

Sales tax is the tax paid to the government for the sale of goods. This is generally a fixed percentage and varies from place to place as well as product to product. Sales tax is levied on each transaction whether it is from Manufacturer to Wholesaler, Wholesaler to Retailer or Retailer to Customer.Sales Tax are of two types: State Sales Tax (VAT, Value Added Tax) - Collected by State GovernmentCentral Sales Tax (CST) - Collected by Central GovernmentWhen the trading is done in the same state i.e. both the parties, buyer and seller are from the same state then the tax applied is VAT but when the parties are from different states then the tax applied is CSTIntrastate Trading – VATInterstate Trading – CSTLet us understand this in more detail with certain scenarios:Scenario 1:Suppose the Manufacturer of certain goods has manufacturing unit in state A and selling his product to the wholesaler in State A itself.Suppose Cost + Margin for the product at Manufacturer’s end is ₹ 100. If the VAT for state A is 10 % then the total VAT amount for this transaction will be ₹ 10, the responsibility to pay this amount to the authority will rest with the manufacturer.Now if the retailer also belongs to State A, keeping ₹ 10 as margin for himself, the wholesaler will sell the product to retailer at ₹ 110 so the tax for the wholesaler will be ₹ 11 but he has to pay only ₹ 1 as tax because the Manufacturer has already paid ₹ 10 as tax to the Government. Now the wholesaler will provide tax certificate of ₹ 10 and ₹ 1 to the retailer.If the retailer again keeps a margin of ₹ 10 then the cost of the product for the customer will be ₹ 120. So the VAT amount for this will be ₹ 12. Now again as tax of ₹ 11 has already been paid to the Government and retailer carries tax certificate of ₹ 10 and ₹ 1 both he has to pay only ₹ 1 as VAT.This is termed as the Input Credit Scheme where the amount of tax is not continuously added for each end user. The final amount of tax levied for this product is ₹ 12 only.Scenario 2:Suppose the Manufacturer of certain goods has manufacturing in State A and selling his product to the wholesaler in State B where there is a branch of manufacturer i.e. Manufacturer has a branch in State B.In this scenario, the manufacturer in State A may stock transfer the goods to its branch in State B to cater to the wholesaler in Sate B i.e. Tax invoice made in State B. Now, this would be considered as intrastate trading and the tax applied will be VAT of State B. The Calculation of the VAT would be similar to that in Scenario 1.Applicability of VAT and CST would be determined by the State of Tax invoice. If, in this scenario, the tax invoice is being raised by the manufacturer in State A, then CST would be applicable.Scenario 3:Suppose the Manufacturer of certain goods has manufacturing in state A and selling his product to the wholesaler in State B. Manufacturer does not have any branch in State B.In this scenario, when manufacturer doesn’t have any facility to raise tax invoice from the wholesaler invoice, CST would be applicable.If the Cost + Margin at the Manufacturer’s end is ₹ 100 and the CST is 8 % then the amount of tax is ₹ 8. It is important to note here that the input credit on CST cannot be claimed. Thus effectively (or practically) the value of product for the Wholesaler will be ₹ 108 as input credit would not be available.If the Wholesaler keeps margin of ₹ 2 with himself then Cost + Margin at Wholesaler’s end will be ₹ 110 and selling to the Retailer in State B. Adding 10 % VAT for the transaction the amount of tax for the Wholesaler will be ₹ 11. Again if the Retailer keeps a margin of ₹ 10 then Cost + Margin at Customer end will be ₹ 120. VAT for this transaction @10% will be ₹ 12 but as the Wholesaler has already paid ₹ 11 as tax to the Government, Retailer will have to pay only Re 1 as taxFor VAT/CST registration, please visit Munim.in.

Posts / Replies

[Ganeshan Kalyani]

I read the post I found that you have mentioned that CST is collected by Central Government. I am sure the tax is collected by State Government. Further there is separate section for submission of article under ' Submit an article' appearing right side of the home page. Thanks.