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Sales Tax
Constitutional Background
No tax shall be levied or collected except by authority of law. Article 265 State Govt. cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the state. Article 286(1) Parliament is authorised to formulate principles for determining when a sale or purchase takes place (a) outside the state (b) in the course of import and export. Article 286(2) Parliament can place restrictions on tax on sale or purchase of declared as goods of special importance and the state government can tax such declared goods only subject to these restrictions. Article 286(3)
Constitution of India
7th Schedule
Union List List I Entry 92A Taxes on sale or purchase of goods other than newspaper where such sale or purchase takes place in the course of interstate trade or commerce. Central Sales Tax Act State List List II Entry no. 54 Tax on sale or purchase of goods other than newspaper except on interstate sale or purchase.
0%
Interstate sale involving movement of goods interstate origin state and destination state Sale of Goods of special importance Declared goods, sold any where in India
< or = 2%
< or = 5%
LST
Sale of Goods of special importance Declared goods, sold any where in India Other than Declared Goods unrestricted Sovereign Rights
< or = 5%
Any Rate
Interstate Sale
Sale of goods.
Illustration 1 A
Ahmedabad
Sale happens in Karnataka
B
Bangalore He likes the goods. Provides the visiting card with details Provides a purchase order Makes a payment Requests B to ship the goods to Ahmedabad Which state is the appropriate state for collection of tax Is there Sale of goods ? Is there Movement of goods Interstate ? In which state does the ownership pass? Which is the appropriate state for collection of tax ?
Karnataka is the appropriate state to collect CST
Illustration 2 A
Ahmedabad
Sale happens in Gujarat
B
Bangalore
IS Gujarat the appropriate state to collect CST
He likes the goods. Provides the visiting card with details Provides a purchase order, Makes a payment Requests B to ship the goods to Ahmedabad
With a condition that goods will be accepted only if the quality controller in Ahmedabad approves the goods. Quality controller approves the goods in Ahmedabad Is there Sale of goods ? Is there Movement of goods Interstate ? In which state does the ownership pass? Which is the appropriate state for collection of tax ?
Interstate Sale
Sale of goods.
STATE IMPLEMENTATION
Illustration 3 B
Hyderabad
A
Ahmedabad
ORIGIN BASED LAW
B
Bangalore
A places order on B at Bangalore for supply of goods B delivers the goods from the Hyderabad factory, as he does not have sufficient stock at Bangalore. Which is the appropriate state for collection of tax
Andhra Pradesh is the appropriate state to collect CST
Illustration 4 A
Bhopal
A
Bangalore
ORIGIN BASED LAW
B
Bangalore
A is in Bangalore. B is also in Bangalore They are next door neighbours A places order on B to supply goods and deliver at the project site in Madhya Pradesh Is it an interstate sale?
Karnataka is the appropriate state to collect CST
Lessons learnt
Whether ownership passes before the movement of goods or after the movement of goods is irrelevant Whether the ownership passes at the originating state or the destination state is irrelevant The location of the buyer and sellers are also irrelevant The place where documentation is done is also irrelevant What is relevant is From which state does the goods originate from? with respect to the contract of sale? That Originating state is the appropriate state for collection of taxes.
Form Raj
Form A Application Form B Registration Certificate Form C - Declaration of continuing registration status Form D sale to Governments Form E Sale-in-transit Form F Branch Transfers Form G Indemnity Bond on loss of forms Form H Sale in the course of Export Form I Sale to SEZ Units Deemed Export Form J Sale to Special Entities
IN - TRANSIT - SALE
A R
Maharashtra
B R
Gujrat
C R
Gujrat
D R
Gujrat
IN - TRANSIT - SALE
A R
C Form
B R
C Form
C R
C Form
D R
Kerala
Tamil Nadu
Karnataka
Andhra Pradesh
IN - TRANSIT - SALE
A R
C Form
E1 Form
B R
C Form
E2 Form
C R
C Form
E2 Form
D R
Kerala
Tamil Nadu
Karnataka
Andhra Pradesh
They are not allowed to resell, but they can take the goods to their own country.
VAT: An Example
A: Supplier of Raw material; B: Manufacturer; C: Wholesaler; D: Retailer Tax rate = 10%
SALES TAX DEPARTMENT 10 A 100+10 B 5 10 200+20 5 C 250+25 D 300+30
Note: Total tax collected = 10+10+5+5 = 30 Which is also equal to 10% of 300 = tax paid by consumer. Consumer
C
Wholesaler Sale Value Rs. 300.00 Gross VAT 10%; Rs. 30.00 Net VAT Rs. 30-20=10.00
A
Raw Material Producer Sale Value Rs. 100.00 Gross VAT 10%; Rs. 10.00 Net VAT Rs. 10.00
D
Retailer Sale Value Rs. 400.00 Gross VAT 10%; Rs. 40.00 Net VAT Rs. 40-30=10.00
Vat Issues
Interstate purchases is not vatable against local sales tax collected. Here I buy interstate and sell locally and lose the interstate tax as it is non redeemable. Interstate sale is vatable against the local purchase tax paid. Govt loose. Here I buy locally and sell interstate and local govt. Redeems all the the input tax which may be higher than the output tax. Input tax is allowed to be rebated only if you collect out put tax. Other wise input tax will become your cost. In VAT Law Exemption means punishment Exporter is refunded the input taxes paid on inputs relatable to export. This is called zero rating of input taxes Zero Rating of input taxes is allowed even to persons selling against H form or I form. With respect to Branch transfer, input tax credits are allowed even though there is no output tax. Input tax only to the extent of 2% is not Vatable. Input taxes paid in excess of 2 % are VATABLE.
VAT Rates
Schedule of Exempted goods Schedule of Vulnerable goods Schedule of Concessional goods
Industrial inputs to the extent notified Information technology goods as notified Capital goods to the extent notified Goods of Local Importance
0% 1% 5%
Declared goods Goods not covered above Works contract, lease of goods,
5% 14% 14%
Non VAT goods no input credit any rate of output tax Input tax restricted goods
Capital Goods
They are used in the business of the dealer for resale, or use in the manufacture for sale
Plant and equipment Goods carriage vehicle Material handling equipment Pollution control equipment Cold storage equipment, storage equipment Billing equipment, including computers
The input taxes paid on purchase of such equipment is allowed to be used for payment of output tax liabilities.
Works contracts
Works contracts are composite, indivisible contracts, containing cost elements such as goods, services and also profit. These indivisible works contracts are allowed to be artificially divided into goods services and profits, so as to arrive at the taxable value of goods that can be subject to levy of VAT. 46th Constitutional amendment has introduced the concept of deemed sales, wherein, the Governments are allowed to divide the contracts so as to arrive at the value of goods and put them to tax.
Goods
Non-Goods
i) Local Purchases i) COST OF Labour ii) Interstate Purchases ii) COST OF Outsourced labour (contract labour) iii) Imported Purchases iii) COST OF Labour Like Charges/establishment iv) COST OF Designs, Drawings, etc iv) Sale-in-transit v) Inter state movement of v) COST OF Testing fees, certification fees etc contractors own goods vi) COST OF Architect fees /Eng fees vi) Free Supplies vii) COST OF Consumables which cease to Exist PLUS FAIR SHARE OF PROFITS
Works contracts
Owner Free Supplies from owner contractee
Principle of accretion Local Purchases Inter-State Purchases Imported Purchases Interstate movement of own goods Contractor Used or consumed in the execution of the works contract
Composition
Value in Crores 1. 2. 3. 4. 5. 6. 7. 8. Gross Value of Contract Less: Assessable in Originating State (Exclusion) Revised Gross Value Less: Labour deductions Taxable value of goods used in the works contract Tax at 4% composition rate Less Input tax credits on local purchases Net out put tax payable Rs. 12,000 2,000 10,000 NIL 10000 400 NIL 400
Input tax credit not allowed Output tax cannot be collected Tax invoice cannot be issued No interstate purchases or import purchases. No interstate or export sale