1

Unit IV

INCOME TAX ACT AND SALES TAX ACT

Corporate Tax Planning, Overview of central Sales Tax Act 1956 Definitions, Scope, Incidence of CST, Practical
issues of CST, Value Added Tax Concepts, Scope, Methods of VAT Calculation, Practical Implications of VAT.
TAX:

Tax is a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the
functional equivalent of a state such that failure to pay is punishable by law.

The term direct tax generally means a tax paid directly to the government by the persons on whom it is
imposed.

An indirect tax (such as sales tax, a specific tax [a tax per unit], value added tax (VAT), or goods and
services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the
ultimate economic burden of the tax (such as the customer).

Types of Taxes:
In India Tax is regulated and administered by the Ministry of Finance under the Government of India. Taxation is the
government's main source of revenue and several types of taxes are applied to different categories of the population.
The following is a brief description of some of the taxes that are levied in India by the government:

Income Tax: The Income Tax Act of 1961 stipulates that any person who qualifies as an assessee and whose
gross income is more than the exemption limit is required to pay Income Tax in accordance with the rates
indicated by the Finance Act.

Corporate Tax is the tax charged on the profits earned by associations and companies by several
jurisdictions. The rate of Corporate Tax in India depends on whether the profits have been passed on to the
shareholders or not.

Value Added Tax: This is the tax that a manufacturer needs to pay while purchasing raw materials and a
trader needs to pay while purchasing goods. VAT is eventually expected to replace Sales Tax. All goods and
services provided by business individuals and companies come under the ambit of VAT.

IT Slab (in INR)

Assesee Type
Male

From Tax
0

To
1,60,000

to be Charged
Nil

www.stmarysmba.co.cc

Female

Senior citizens

1,60,000

5,00,000

10%

5,00,001
8,00,001
0

8,00,000
And above
1,90,000

20%
30%
Nil

1,90,001
5,00,001

5,00,000
8,00,000

10%
20%

8,00,001
0
2,40,001

And above
2,40,000
5,00,000

30%
Nil
10%

5,00,001
8,00,001

8,00,000
And above

20%
30%

Capital Gains Tax: A Capital Gain can be defined as an, any income generated by selling a capital
investment (business stocks, paintings, houses, family business, farmhouse, etc.). The 'gain' here is the
difference between the price originally paid for the investment and money received upon selling it, and is
taxable.

Service Tax As per the Finance Act of 1994, all service providers in India, except those in the state of Jammu
and Kashmir, are required to pay a Service Tax in India.

Fringe Benefit Tax: As per Section 115WB of the Finance Bill, expenses incurred for employees, by an
employer (individual/company/local authority/trader) for purposes of entertainment, gifts, telephone,
clubbing, festivals etc., will be treated as Fringe Benefits and will be taxed.
Sales Tax: a tax based on the cost of the item purchased and collected directly from the buyer
Tax Planning is an application to reduce tax liability through the finest use of all accessible allowances,
exclusions, deductions, exemptions, etc, to trim down income and/or capital profits.
Tax avoidance
o is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is
payable by means that are within the law.
o The use of legal methods to modify an individual's financial situation in order to lower the amount of
income tax owed. This is generally accomplished by claiming the permissible deductions and credits

Tax evasion

o is the general term for efforts not to pay taxes by illegal means
o An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its
true tax liability

OBJECTIVES OF TAX PLANNING

www.stmarysmba.co.cc

3
1. Reduction of Tax liability: By proper tax

planning, a tax payer may avail of deduction and

exemptions admissible to him and thus tax burden could have been reduced to nil.
2. Health Growth of Economy: A savings by legally sanctioned devices is the prime factor for the healthy
growth of the economy of a nation and its people. An income saved and wealth accumulated in violation of
law is the burdens on the economy where the nations awaken in the atmosphere of peace and prosperity.
3. Productive Investment: The tax laws offer large avenues for the productive investment of the earnings by
granting absolute or substantial relief from taxation.
4. Minimization of litigation: There is the greatest desire in the hearts of the taxpayers to pay the taxes in the
minimum and sometimes overzealous tax administrators are out to extract the maximum. This results in
unscrupulous litigation between the taxpayers & tax collectors.
5. Economic Stability: Avenues on productive investments are largely availed by the taxpayers. The tax
planning thereby creates economics of the nation and its people by even distribution of economic resources.

NEED FOR TAX PLANNING

1. It enables the assessee to make proper expense planning, capital budget planning, sales promotion planning.
2.

It provides option to the taxpayer to avail of incentives in the nature of exemption, deduction, concessions,
rebates and reliefs.

3. It aims at devising or adopting an arrangement so as to bring about the least incidence of tax.
4. It is more reliable then tax evasion & tax avoidance techniques.
5. High taxation leaves an assessee with lesser money.
6. Every organization should aim at not maximum profit but maximum after tax profits which are possible only
by proper tax planning.
7. When a tax planner is prepared to do his job meticulously, efficiently and intelligently, he has to take into
consideration the following factors:
i.
ii.
iii.
iv.
v.

Gather all facts and estimates

Share income/ wealth between different entities
A through knowledge of all direct tax laws.
A through knowledge of all latest amendments.
Review the tax plan.

METHODS OF TAX PLANNING

1. Short range Tax Planning: It may be year to year planning to achieve specific or limited objectives.
2. Long range Tax planning: It involves entering into activities which may not pay off immediately.

www.stmarysmba.co.cc

4
3. Permissive Tax planning: It is tax planning under

the express provisions of tax laws. Tax laws of our

country offer many exemptions and incentives.

4. Purposive tax planning: It is based on the measures which circumvent the law. The permissive tax planning
has the express sanction of the statue while the purposive tax planning does not carry such sanction.

Central Sales Tax, 1956

Constitutional Background

INDIA IS UNION OF STATES - Our Constitution generally follows British pattern, though concepts of
federal structure are borrowed from American and other Constitutions.

India is a Union of States. The structure of Government is federal (centralized) in nature. Government of
India (Central Government) has certain powers in respect of whole country.

India is divided into various States and Union Territories and each State and Union Territory has certain
powers in respect of that particular State.

Taxation under Constitution

In the basic scheme of taxation in India, it is envisaged that
(a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except
on alcoholic drinks) and Customs
(b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income
(c) Municipalities will get tax revenue from octroi and house property tax.

Excise Duty is an indirect tax levied and collected on the goods manufactured in India.
Customs duty is a kind of indirect tax which is realized on goods of international trade.
In economic sense, it is also a kind of consumption tax. Duties levied by the government in relation to
imported items are referred to as import duty.
In the same vein, duties realized on export consignments is called export duty
Octroi (O. Fr. Octroyer, to grant, authorize) is a local tax collected on various articles brought into a district
for consumption.
The Central sales tax Act 1956 was enacted by the Parliament and received the assent of the president on
21.12.1956.

Imposition of tax became effective from 01.07.1957.

Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax
collected in each State is retained by that State Government itself.

Objectives of CST

It formulates principles for determining where sale or purchase of goods takes place

www.stmarysmba.co.cc

In the course of inter state trade

In the course of import/export trade
It aims to find out determination of taxable turnover
It aims to find out Registration of dealers
It implies how and when central sales tax is imposed

Constitutes Of Sales Tax Act in India

According to S2 (g), a sale refers to any transfer of property in goods by one person to another for cash or, deferred
payment or, for any other valuable consideration. It also includes the following:
1. A sale or purchase of goods is said to take place when the transfer of property in the existing goods or future
goods takes place for consideration of money.
2. The goods have been divided into different categories and different rates of sales tax are charged for different
categories of goods.
3. In most of the cases related to the sales tax, the tax on the sale or purchase of goods is at single point.
4. Under the provisions of some state laws the assesses are divided into several categories such as manufacturer,
dealer, selling agent etc. and such as assess is required to obtain a registration certificate to that effect. The
sales tax or the purchase tax is levied on that assessee on the basis of his category such as dealer,
manufacturer etc. on production of certain forms or certificates (and differential rates of sales tax are levied).
5. Generally, a quarter returns of sales or purchases is insisted upon and the assessee is required to furnish the
return in the prescribed form.
6. At the time of assessment, the assessee has to furnish all the documentary evidence and satisfy the concerned
sales tax / commercial tax officer.
7. The sales tax laws of the states prescribe the procedure to be followed in case an assessee prefers to make an
appeal.
8. Every dealer should apply for registration and obtain a registration certificate to that effect. The registration
certificate number should be quoted in all the bill / cash memos.
9. A supply, by way of or, as part of any service or, in any other manner whatsoever of goods, of goods, being
food or any other article for human consumption or any drink (whether intoxicating or not), where such
supply or service if for cash, deferred payment or other valuable consideration.
However, this does not include a mortgage or hypothecation of or a charge or pledge on goods.
In order to constitute a sale, it is necessary that the following conditions must exist:
1.
2.
3.
4.

The parties are competent to contract.

There is an agreement between the parties for the purpose of transferring title to the goods.
It must be supported by money consideration.
As a result of the transaction, the property must actually pass in the goods.

www.stmarysmba.co.cc

What are goods?

Goods, for the purposes of the Act, include the following:

Materials.
Articles.
Commodities.
All kinds of movable property. (Movable property is property, which is capable of being lifted, carried,
drawn, turned or conveyed or in any way made to change place or position. The nature of movable property is
such that its identity is not lost if it is moved from one location to another.).
Standing crops, grass, trees, timber and other things attached to the earth, if it is agreed under the contract of
sale that they will be severed or cut off the land where they are so attached; or, if the crop or timber is
identified; the contract is unconditional; or the crop or timber is in a deliverable state.
Electric meters, which are the equipments, used for measuring electricity for the purpose of selling it to
consumers, are goods.
It is important to note that only for the purposes of the CST Act, the following are not deemed to be
goods and, therefore, are not assessable to CST.
Newspapers.
(Exception: sale of old or waste newspapers is taxable & a dealer may buy raw material for newspapers at a
concessional rate on submission of Form C)
Actionable claims.
Stocks shares and securities.

Sales Tax In India

Sales tax is levied on the sale of a commodity which is produced or imported and sold for the first time. If the product
is sold subsequently without being processed further, it is exempt from sales tax.
Sales tax can be levied either by the Central or State Government, Central Sales tax department. Also, 4 per cent tax
is generally levied on all inter-State sales. State sales taxes that apply on sales made within a State have rates that
range from 4 to 15 per cent. Sales tax is also charged on works contracts in most States and the value of contracts
subject to tax and the tax rate vary from State to State. However, exports and services are exempt from sales tax.
Sales tax is levied on the seller who recovers it from the customer at the time of sale.
Sales Tax in India is that form of tax which is imposed by the government on sale/purchase of a particular commodity
within the country. It is imposed under Central Government (Central Sales Tax) and the State Government (Sales
Tax) Legislation. Normally, each state has its own sales tax act and levies the tax at various rates. Apart from sales
tax, certain states also impose extra charges such as works contracts tax, turnover tax & purchaser tax. Thus, sales tax
plays a major role in acting as a major generator of revenue for the various State Governments.
Under the sales tax which is an indirect form of tax, it is the responsibility of seller of the commodity to collect or
recover the tax from the purchaser. Generally, the sale of imported items as well as sale by way of export is not
included in the range of commodities that require payment of sales tax. Moreover, luxury items (such as cosmetics)
are levied higher sales tax rates. The Central Sales Tax (CST) Act that comes under the direction of Central
Government takes into consideration all the interstate sales of commodities.

www.stmarysmba.co.cc

7
Hence, we see that sales tax is to be paid by every dealer when he sells any commodity, during inter-state trade or
commerce, irrespective of the fact that there may be no liability to pay tax on such a sale of goods under the tax laws
of the appropriate state. Sales tax is to be paid to the sales tax authority of the state from which the movement of the
commodities starts or commences.
VAT replaces sales tax
However, most of the states in India, from April 01, 2005, have supplemented the sales tax with the new Value
Added Tax (VAT). VAT in India is classified under the following tax slabs:

0% for the essential commodities

1% on gold ingots as well as expensive stones
4% on capital merchandise, industrial inputs, and commodities of mass consumption
12.5% on all other items
Variable rates (depending on state) are applicable for tobacco, liquor, petroleum products, etc.

A Central Sales Tax which is at the rate of 4% is also levied on inter-State sales but would be eliminated gradually.
Municipal/Local Taxes

Octroi/entry tax: Certain municipal jurisdictions levy an Octroi/entry tax on the entry of goods

Other State Taxes

Stamp duty on the transfer of assets

Property/building tax that is levied by local bodies
Agriculture income tax levied by the State Governments on the income from plantations
Luxury tax that is levied by certain State Government on specified goods

Budget 2009-2010
According to the budget 2009-2010, Central Sales tax is to be reduced to 2% from April
Who Pays Sales Tax In India?
Sales Tax i.e. the Central Sales Tax (CST) is an indirect tax as it is recovered from the buyers/consumers as a part
of the consideration for the sale of goods. However, for the purpose of CST, the actual payment of the Sales Tax is
made by every dealer on the goods sold by him in the course of inter-state trade or commerce. This tax is payable
even though there may be no liability to pay the tax on the sale of goods according to the tax laws of that particular
state.
Person Liable to Pay Central Sales Tax
Section 8(1) of the Central Sales Tax states that every dealer who is in the course of inter-state trade or commerce
will be liable to pay tax on sale of goods under this Act. Thus, liability to pay Sales Tax lies with the dealer who
sells the goods. Dealer for the purpose of this Act includes:

www.stmarysmba.co.cc

8
Dealer Section 2(b) of the CST Act defines the word
dealer. Dealer means any person who carries on the
business of buying, selling, supplying or distribution of goods. The business could be carried on either regularly or
otherwise, either directly or indirectly, either for cash or for deferred payment or for valuable consideration.
Any person who is a dealer would be liable to pay Sales Tax. The term dealer includes:
a. a local authority, a body corporate, a company, any cooperative society, club, firm, Hindu Undivided Family
(HUF) or other Association Of Persons (AOP) which carries on such business;
b. a factor, broker, commission agent, del credere agent, or any other mercantile agent, by whatever name called
who carries on the business of buying, selling, supplying or distribution of goods belonging to any principal
whether disclosed or not; and
c. an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether
disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a
nominee of principal.
Government as a Dealer Explanation 2 of Section 2(b) of the Act clarifies that the Government which buys, sells,
supplies or distributes goods, whether in the course of business or not, whether directly or otherwise, whether for cash
or deferred payment or for commission, remuneration or other valuable consideration, shall be a dealer and would
require to pay Sales Tax. Government can be a dealer if specifically included in the definition of dealer.
The exception to this clause is the sale, supply or distribution of un-serviceable or old stores or old materials or waste
products or obsolete or discarded machinery or parts or accessories. This exception is made because of the fact that
all Government departments have to make such sale of old goods. But, this exception is not applicable to private
enterprises. It is made only for Government. Public Sector Undertakings (PSU i.e. Government Companies) are not
Government and hence do not fall under the exemption.
Ancillary, Incidental and Casual Business Dealer Any activity which is incidental or ancillary to the main business
also constitutes business and thus, any person engaged in such business or any other casual business is also a dealer
and is liable to pay Sales Tax.
Club as a dealer A members club whether incorporated or unincorporated is a dealer and will require registration.
It is stated that the supply of goods by an unincorporated body to its members will be considered sale. Thus a club
that supplies goods to its members is a dealer and thus liable to pay CST.
To Whom Central Sales Tax is Payable
Sales Tax is paid to the Sales Tax Authority in the state from where the goods are moved, i.e. the state from where
the movement of goods begin. The dealer would pay the tax to the state authority from where he makes the sale, even
though there may be no liability of tax on sale of goods according to the tax laws of that state itself.
Dealers in Sales Tax India
A dealer under Section 2(b) means any person, who carries on (whether regularly or otherwise) the business of
buying, selling, supplying or distributing goods directly or indirectly for cash or, for deferred payment or for
commission remuneration or, other valuable consideration.
Dealer also includes:-

www.stmarysmba.co.cc

9
1. A local authority, a body corporate, a company,
any co-operative society or other society, club,
firm, Hindu undivided family or other association of persons which carries on such business.
2. A factor, broker, commission agent, del credere agent or any other mercantile agent, by whatever name called
and, whether of the same description as mentioned earlier or not, who carries on the business of buying,
selling, supplying or distributing goods belonging to any principal, whether disclosed or not.
3. An auctioneer, who carries on the business of selling or auctioning goods belonging to any principal, whether
disclosed or not and, whether the offer of the intending purchaser is accepted by him or, by the principal or, a
nominee of the principal.
4. Every person, who acts in any State, as an agent of a dealer residing outside that State and buys, sells, supplies
or distributes goods in the State or, acts on behalf of such dealer aso A mercantile agent, as defined in the Sale of Goods Act, 1930.
o An agent for handling of goods or documents of title relating to goods.
o An agent for the collection or the payment of the sale price of goods or, as a guarantor for such
collection or payment.
Every local branch or office in a State of a firm, registered outside that State or, a company or, other body corporate,
the principal office or headquarters that is outside that State, shall be deemed to be a dealer under the Act.
Dealers Must Furnish Security.
The Sales Tax Authority has the power to impose a condition for the issue of certificate of registration and requires
the dealer to furnish security, as specified in the prescribed manner and, within the prescribed time.
This security is required for the following reasons:

To insure that the tax payable is properly realized.

For custody and use of forms.

Maximum amount of security that a dealer can be asked to furnish

There is an upper limit to the amount of security that can be asked for by the authorities to the dealer.

In the case of a dealer who applies for compulsory registration, the amount of tax, payable by him for the
current year(I.e. for which the security or additional security is demanded), under the CST Act (tax payable is
estimated on the basis of turnover of the dealer for the current year).
In the case of a dealer, who has made an application under voluntary registration or, is otherwise registered
under voluntary registration, a sum equal to tax, leviable under the CST Act (the amount, estimated in
accordance with the sales to such dealer in course of inter-state trade or commerce for the current year, had
such dealer not registered under the Act.

The Central Sales Tax, 1956

Introduction
An Act to formulate principles for determining when a sale or purchase of goods takes place in the course of interState trade or commerce or outside a State or in the course of imports into or export from India, to provide for the
levy, collection and distribution of taxes on sales of goods in the course of inter State trade or commerce and to
declare certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and

www.stmarysmba.co.cc

10
conditions to which State laws imposing taxes on the sale
subject.

or purchase of such goods of special importance shall be

Be it enacted by Parliament in Seventh Year of Republic of India as follows:

SHORT TITLE, EXTENT AND COMMENCEMENT

(1) This Act may be called the Central Sales Tax Act, 1956.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in the Official Gazette,
appoint, and different dates may be appointed for different provisions of this Act.
2. DEFINITIONS. - In this Act, unless the context otherwise requires,

(a) "Appropriate State" means

(i) in relation to a dealer who has one or more places of business situated in the same State, that State;
(ii) in relation to a dealer who has place of business situated in different States, every such State with respect
to the place or places of business situated within its territory;
(aa) "business" includes
(i) any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or
manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to
make gain or profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure
or concern; and
(ii) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture,
adventure or concern;
(ab) "crossing the customs frontiers of India" means crossing the limits of the area of a customs station in which
imported or exported goods are ordinarily kept before clearance by customs authorities.
Explanation : For the purposes of this clause, "customs station" and "customs authorities" shall have the same
meanings as in the Customs Act, 1962 (52 of 1962);
(b) "dealer" means any person who carries on (whether regularly or otherwise) the business of buying, selling,
supplying or distributing goods, directly or indirectly, for cash, or for deferred payment, or for commission,
remuneration or other valuable consideration, and includes, - (i) a local authority, a body corporate, a company, any
co-operative society or other society, club, firm, Hindu undivided family or other association of persons which carries
on such business;

www.stmarysmba.co.cc

11
(ii) a factor, broker, commission agent, del
credere agent, or any other mercantile agent, by whatever
name called, and whether of the same description as hereinbefore mentioned or not, who carries on the business of
buying, selling, supplying or distributing, goods belonging to any principal whether disclosed or not; and
(iii) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal,
whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a
nominee of the principal.
(c) "declared goods" means goods declared under section 14 to be of special importance in inter-State trade or
commerce;
(d) "goods" includes all materials, articles, commodities and all other kinds of movable property, but does not
include newspapers, actionable claims, stocks, shares and securities;
(dd) "place of business" includes, (i) in any case where a dealer carries on business through an agent by (whatever name called), the place of
business of such agent;
(ii) a warehouse, godown or other place where a dealer stores his goods; and
(iii) a place where a dealer keeps his books of accounts;
(e) "prescribed" means prescribed by rules made under this Act;
(f) "registered dealer" means a dealer who is registered under section 7;
(g) "sale", with its grammatical variations and cognate expressions, means any transfer of property in goods by one
person to another for cash or for deferred payment or for any other valuable consideration, and includes a transfer of
goods on the hire-purchase or other system of payment by installments, but does not include a mortgage or
hypothecation of or a charge or pledge on goods;
(h) "sale price" means the amount payable to a dealer as consideration for the sale of any goods, less any sum
allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged
for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost
of freight or delivery or the cost of installation in cases where such cost is separately charged; (i) "sales tax law"
means any law for the time being in force in any State or part thereof which provides for the levy of taxes on the sale
or purchase of goods generally or on any specified goods expressly mentioned in that behalf, and "general sales tax
law" means the law for the time being in force in any State or part thereof which provides for the levy of tax on the
sale or purchase of goods generally;
(j) "turnover" used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices
received and receivable by him in respect of sales of any goods in the course of inter-State trade or commerce made
during any prescribed period and determined in accordance with the provisions of this Act and the rules made there
under;
(k) "year", in relation to a dealer, means the year applicable in relation to him under the general sales tax law of the
appropriate State, and where there is no such year applicable, the financial year.

www.stmarysmba.co.cc

12
PRINCIPLES FOR DETERMINING PLACE OF

SALE OR PURCHASE

It is necessary to determine when a sale or purchase of goods takes place in the course of interstate trade in order to impose central sales-tax.
1. IN THE COURSE OF INTER STATE TRADE
2. SALE OR PURCHASE OF GOODS OUTSIDE A STATE
3. SALE OR PURCHASE OF GOODS IN THE COURSE OF IMPORT AND EXPORT

1. IN THE COURSE OF INTER STATE TRADE

A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or
purchase, (a) Occasions the movement of goods from one State to another; or
(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.

(i) Occasions movement of goods section 3 (a)

This means there is a completed sale in pursuance of contract of sale or purchase where by goods
move from one state to another.
A sale can be treated as an inter- state sale if, all the following conditions are satisfied.
1. Transaction is a Completed sale.
2. The contract of sale contains a condition for the movement of goods from one state to another.
3. There should be physical movement of good from one state to another
4. The sale concludes in the state where the goods are sent and that state is different from the state from where the
goods actually moved.
5. It is not necessary that sale precedes the inter- state movement of goods, sale can be entered before or after the
movement of goods.
6. It is immaterial in which state the ownership of goods passes from seller to buyer.
Illustration
A of Bangalore sends goods in his own name to Delhi, At Delhi goods are sold to different parties by the
employees of A.
Given: In this case, the movement of goods is not result of sale or agreement to sell; it is sale which takes place in
Delhi and not subject to central sales tax.

(ii) Sale by transfer of documents Section 3 (b)

If sale or purchase of goods is effected by transfer of documents of title to the goods during their movement
from one state to another then, such sale or purchase shall be deemed to take place in the course of inter- state
trade.
A Document of title to goods bears internal evidence of ownership of goods by holder of document. Some of
the examples are Lorry Receipt (LR) in case of transport by road; Railway receipt (RR) in case of transport by
rail, bill of Lading (BL)in case of transport by sea, Airway bill (AWB) in case of transport by air.

www.stmarysmba.co.cc

13

Illustration

A of Kanpur sends goods to B of Delhi. The Railway Receipt is sent by post to B while the goods are in
transit B sells goods by transfer of documents to C of Bombay. In this case sale was effected by transfer of
documents of title to goods (Railway Receipt) to the buyer when the goods were in movements from Kanpur
to Delhi.

2. WHEN IS A SALE OR PURCHASE OF GOODS SAID TO TAKE PLACE OUTSIDE A STATE.

(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance
with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all
other States.
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State, (a) in the case of specific or ascertained goods, at the time the contract of sale is made; and
(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the
seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.
3. WHEN IS A SALE OR PURCHASE OF GOODS SAID TO TAKE PLACE IN THE COURSE OF IMPORT OR
EXPORT?

(1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of
the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents
of title to the goods after the goods have crossed the customs frontiers of India,
(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the
territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of
title to the goods before the goods have crossed the customs frontiers of India.
(3) Notwithstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding
the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in
the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with,
the agreement or order for or in relation to such export.
Determination of turnover

It forms a part of aggregate sales price, and then amount of tax collected by a registered dealer shall be
subtracted from his gross turnover
Tax is calculate by the following formula,

Rates of tax * Aggregates of Sales Price

100 + Rate of tax

Example:

www.stmarysmba.co.cc

14
Ajay sells goods A and B. A is charged at 4% and B at 2%. The total sales price before deducting
central sales tax of A and B is Rs. 8 lakhs, which includes Rs. 5 lakhs of goods A and Rs. 3 lakhs of goods B. What is
the turnover of Ajay?
Solution:
Goods A
Aggregate Sales price
Rate of Tax

= Rs. 5, 00,000
= 4%

CST = 4*5, 00,000

100+4
= Rs. 19,230
Turnover for Good A = Rs. 5, 00,000 - Rs. 19,230
= Rs. 4, 80,770
Goods B
Aggregate Sales price
Rate of Tax

= Rs. 3, 00,000
= 2%

CST = 2*3, 00,000

100+2
= Rs. 5,882
Turnover for Good B = Rs. 3, 00,000 - Rs. 5,882
= Rs. 2, 94,118
Total turnover for Ajay = Rs. 4, 80,770 + Rs. 2, 94,118
= Rs. 7, 74,888
Value Added Taxes (VAT) in India

Value Added Tax (VAT) is a general consumption tax that is assessed on the value added to goods &
services.
VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle of production of goods
and services with the provision of a set-off for the tax paid at earlier stages in the cycle/chain.
It is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods
or upon the transfer of the goods to its ultimate consumers.

www.stmarysmba.co.cc

15

VAT SYSTEM

Producer

Manufacturer

Pays the FIRST

POINT tax

Pays tax on
VALUE ADDED

Total tax incidence on consumer =

Trader

Consumer

Pays tax on
VALUE ADDED
FP tax paid by producer
+ Tax on Value added by M/F
+ Tax on value added by trader

= Tax on retail sale price

www.stmarysmba.co.cc

16

VAT:An Example
A : Producer of Raw material; B: Manufacturer; C: Wholesaler
D: Retailer
Tax rate=10%

SALES Tax Department

10

10

100+10

200+20

250+25

300+30

Note : Total tax collected = 10+10+5+5 = 30

Consumer
Which is also equal to 10% of 300 = tax paid by consumer.

Method of Collection
There are two methods for collection of VAT in India.

In the first method, tax is charged separately on the basis of the tax which is paid on purchase, and the tax
that is payable on the sale (shown separately in the invoice). Therefore, the difference between the tax paid on
purchase and the tax payable on sale as per the invoice is the VAT.

In the second method, tax is collected and charged on the aggregate value of the tax payable on sale and
purchase, by applying the rate of tax applicable to the goods. Therefore, the difference between the sale price
and purchase price would be VAT. It means VAT is the tax which consumers ultimately face, which is
collected at each stage.

Questions relating to VAT.

1. What is the difference between Sales Tax and VAT?
VAT is levied on all goods & services while sales tax is only levied on goods. Thus, a lower tax rate is needed to
collect the same amount as sales tax. VAT has no cascading effect. The VAT mechanism of auto-control reduces tax
evasion, therefore enhancing income tax collection, VAT is levied at import.

www.stmarysmba.co.cc

17
2. What is input tax?
Input generally mean goods purchased by a dealer in the
course of his business for re-sale or for use in the manufacture, processing, packing/storing of other goods or any
other business use. The tax paid on inputs is known as Input Tax. It has been defined in Section 2(xvii) of the Model
VAT Bill, 2003 thus: "Input tax means the tax paid or payable under this Act by a registered dealer to another
registered dealer on the purchase of goods in the course of business for resale or for manufacture of taxable goods or
for use as containers or packing material or for the execution of works contract."
3. What is input tax credit (ITC)?
It is the credit for tax paid on inputs. Every dealer has to pay output tax on the taxable sale effected by him. The basic
formula of VAT is that every dealer pays tax only on the value addition in his hands. In simple words input tax credit
is the mechanism by which the dealer is enabled to set off against his output tax, the input tax. Dealers are not eligible
for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as it
is stipulated in the respective State legislation.
4. What are the `sales' not liable to tax under the VAT Act?
Since the VAT Act applies only to sales within a State, the following sales shall not be governed by the VAT Act:
a) sale in the course of inter-State trade or commerce which shall continue to be liable to tax under the Central
Sales Tax Act, 1956;
b) sale which takes place outside the State; and
c) sales in the course of export or import.

The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation. The existing sales tax structure
allows for double taxation thereby cascading the tax burden.
For example, before a commodity is produced, inputs are first taxed, the produced commodity is then taxed
and finally at the time of sale, the entire commodity is taxed once again.
By taxing the commodity Multiple times, it has in effect increased the cost of the goods and therefore the
price the end consumer will pay for it.

The transaction chain under VAT assuming that a profit of Rs 10 is retained during each sale
SALE 'A' OF CHENNAI
@ Rs. 100/

'B' OF
BANGALORE

SALE
@ Rs. 114/

'C' OF
BANGALORE

www.stmarysmba.co.cc

18
SALE
@ Rs. 124/

'D' OF
BANGALORE

SALE
@ Rs. 134/

CONSUMER
IN
BANGALORE

Tax implication under Value Added Tax Act

Seller

Buyer

Selling Price (Excluding

Tax)

Tax Rate

Invoice value (Incl

Tax)

Tax
Payable

Tax
Credit

Net Tax
Outflow

100

4% CST

104

4.00

114

12.5%
VAT

128.25

14.25

0*

14.25

124

12.5%
VAT

139.50

15.50

14.25

1.25

Consumer

134

12.5%
VAT

150.75

16.75

15.50

1.25

VAT CST

16.75
4.00

Total to Govt.

*Note:

CST Paid cannot be claimed for credit. CST is assumed to remain the same though it could to be reduced to
2% when VAT is introduced and eventually phased out.
VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases (inputs) and capital goods.
What this means is that dealers can actually deduct the amount of tax paid by him for purchase from the tax collected
on sales, thereby paying just the balance amount to the Government.

Advantages of VAT
1) Coverage
If the tax is carried through the retail level, it offers all the economic advantages of a tax that includes the entire retail
price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms
instead of being concentrated on particular groups, such as wholesalers or retailers.
If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if
their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under
other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the
widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the
opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one
form or another by the previous regime.
2) Revenue security
VAT represents an important instrument against tax evasion and is superior to a business tax or a sales tax from the
point of view of revenue security for three reasons.
In the first place, under VAT it is only buyers at the final stage who have an interest in undervaluing their purchases,
since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases.
Therefore, tax losses due to undervaluation should be limited to the value added at the last stage. Under a retail sales
tax, on the other hand, retailer and consumer have a mutual interest in under declaring the actual purchase price.

www.stmarysmba.co.cc

19
Secondly, under VAT, if payment of tax is successfully
avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently,
the government will at least have collected the VAT paid at stages previous to that at which the tax was avoided;
while if evasion takes place at the final stage the state will lose only the tax on the value added at that point.
If evasion takes place under a sales tax, on the other hand, all the taxes due on the product are lost to the government.
A significant advantage of the value added form in any country is the cross-audit feature. Tax charged by one firm is
reported as a deduction by the firms buying from it. Only on the final sale to the consumer is there no possibility of
cross audit.
Cross audit is possible with any form of sales tax, but the tax-credit feature emphasises and simplifies it and is likely
to make firms more careful not to evade because they know of the possibility of cross check.
3) Selectivity
VAT may be selectively applied to specific goods or business entities. We have already addressed essential goods
and small business. In addition the VAT does not burden capital goods because the consumption-type VAT provides
a full credit for the tax included in purchases of capital goods. The credit does not subsidize the purchase of capital
goods; it simply eliminates the tax that has been imposed on them.
4) Co-ordination of VAT with direct taxation
Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate income taxes. The
operation of a VAT resembles that of the income tax more than that of other taxes, and an effective VAT greatly aids
income tax administration and revenue collection. It is interesting to note that when Trinidad and Tobago set out to
introduce VAT it chose one of its top income tax administrators as the VAT Commissioner.
It must be stressed once again that if properly implemented VAT can ultimately lead to a reduction in overall rates of
tax.
Revenues will not be sacrificed but would in fact be enhanced as a consequence of the broadened tax base. This does
not seem to be a bad idea at all.
The main disadvantages which have been identified in connection with the Value Added Tax are:
1) VAT is regressive
It is claimed that the tax is regressive, ie its burden falls disproportionately on the poor since the poor are likely to
spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts
to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world and even
Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort.
Further, there is now a tendency in most countries to reduce this progressivity of taxes as has been done in Guyana
where a flat rate of income tax has been introduced. In any case VAT recognizes and makes room for progressivity
by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for
steep rates of tax on luxury items, although this can create problems for administration and open opportunities for
evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place
extensively in the area of customs duties.
2) VAT is too difficult to operate from the position of both the administration and business.

www.stmarysmba.co.cc

20
(a) The administration
It is often argued that VAT places a special burden on tax administration. However, it is worth noting that wherever
VAT was introduced one of its effects was the rationalization and simplification of the previous indirect tax system
and its administration. Each of the previous indirect taxes such as customs duties, purchase tax and excise duties
replaced by VAT had its own rate structure as well as a different tax base and separate administrative procedure. The
consolidation and incorporation of numerous indirect taxes into the VAT would simplify the rate structure, tax base,
and administration of the indirect tax system, thereby eliminating the overlapping auditing practices that had plagued
those systems.
In addition, the abolition of a number of alternative indirect taxes releases experienced personnel to focus on a single
tax. It also means reduction in the number of forms used, legislation to be applied and returns and accounts with
which the business person has to contend.
(b) Business
It is true that the VAT is collected from a larger number of firms than under any form of income tax or single state
sales tax; to the typical smaller firms the complexities of the tax and the need for more extensive records (for
example, to justify deductions) are likely to prove serious.
3. VAT is inflationary
Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an
opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes
they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead
to a reduction in income tax, any price increases may be offset by increases in take-home pay.
In any case, any price consequence is one time only and prices should stabilise thereafter.
4. VAT favors the capital intensive firm
It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capitalintensive competitor, since the ratio of value added to selling price is greater for the former. This is a real problem for
labour-intensive economies and industries.

Questions
1. Write notes on the following,
(a) Sales Tax
(b) Tax evasion
(c) Tax planning
(d) Tax avoidance
(e) Need for Corporate Tax planning
2.
3.
4.
5.
6.

What are the areas of tax planning in Central Sales Tax Act? Describe.
What are the advantages and disadvantages in VAT?
Practical issues of CST.
Methods of VAT Calculation.
Practical Implications of VAT.

www.stmarysmba.co.cc