Essay On One State Many Worlds Karnataka Vat

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What is Sales Tax?

Trade has formed an integral part of world history, shaping the world into the form it is in today. It is hard to imagine a world without any trading, be it of goods or services. It was this desire to trade that led to countries embarking on voyages to find new trading partners, eventually changing the entire demography of Earth.

The world survives and thrives on trade and governments across the globe have found a way to use trade to fill their coffers. Sales Tax is a form of tax paid to a governing body for the sale of goods and services. Sales tax is an indirect taxand 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.

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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:

India has emerged as a sound democracy has achieved great economic progress compared to most countries. A major reason for the growth and development of the country can be attributed to the taxes collected by the Government. India follows the system of a central union government at the centre and state governments in each state, with each government choosing to follow a taxation policy to meet their demands.

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:

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.

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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.

  • Chairman
  • Member (Income Tax)
  • Member (Legislation and Computerisation)
  • Member (Revenue)
  • Member (Personnel and Vigilance)
  • Member (Investigation)
  • Member (Audit and Judicial)

Functions:

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 .

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Taxation refers to the process of an authority levying certain charges on goods, services and transactions. It is one of the foremost powers held by the government of any country. Various types of taxes are applicable at various stages of sale of goods and services; VAT is one such tax.

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What is Value Added Tax or VAT?

VAT is a kind of tax levied on sale of goods and services when these commodities are ultimately sold to the consumer. VAT is an integral part of the GDP of any country.

While VAT is levied on sale of goods and services and paid by producers to the government, the actual tax is levied from customers or end users who purchase these. Thus, it is an indirect form of tax which is paid to the government by customers but via producers of goods and services.

VAT is a multi-stage tax which is levied at each step of production of goods and services which involves sale/purchase. Any person earning an annual turnover of more than Rs.5 lacs by supplying goods and services is liable to register for VAT payment payment. Value added tax or VAT is levied both on local as well as imported goods.

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Features of Value Added Tax in India:

  • Similar goods and services are taxed equally. So a similar television from all brands will be taxed the same
  • VAT is levied at each stage of production and hence makes the taxation process easier and more transparent
  • VAT reduces chances of tax evasion and fosters compliance
  • Encourages transparency in sale of goods and services at the tiniest level

Calculation of VAT:

VAT is actually calculated as the difference between input tax and output tax.

VAT = Output Tax – Input Tax

Where output tax is the tax received by the seller for sale of his goods and services and input tax is the tax paid by the seller for raw materials required to manufacture his goods and services.

VAT Example:

Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials. Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000

Now after selling the food made by using the purchased raw materials, Ram was able to make Rs.1,00,000. Supposing 10% output tax, output tax becomes Rs.10,000

So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000

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Why is VAT required and How is it useful?

India was one of the last few countries to introduce VAT as a form of tax. Taxation process in India was believed to be exploited the most by businessmen and enterprises which had found loopholes for evading taxes. VAT was introduced to minimize this evasion and render transparency and uniformity to the tax payment process.

Value Added Tax is levied in multiple stages of production of goods and services and comes under the purview of various state governments. Hence, VAT in India might slightly differ from one state to another.

  • No exemptions under the VAT system. Levying tax at each stage of the production process ensures better compliance and less loopholes to be exploited
  • VAT, when enforced properly forms an important instrument for tax consolidation of the country and as such helps towards solving the fiscal deficit issue to some extent
  • Since, VAT is a globally accepted taxation system, it will help India integrate better into global trade practices

VAT Implementation In Various State of India:

Since enforcement of VAT and collection of it comes under the purview of state governments, different states have different VAT rules and implementation guidelines. Hence, the procedure for tax implementation, rates of VAT, timelines for VAT payment and VAT return filing, all differ from one state to another.

Despite state-specific implementations, VAT in India can be divided into four main subheads.

  • NIL VAT Rate:

    In a lot of states items that are very basic in nature are sold without levying any VAT on them. These items are mostly those sold by the unorganized sector in their most basic or natural form. Examples of this type of items are salt, khadi, condoms etc.

  • 1% VAT Rate:

    For items which tend to be highly expensive, the percentage of VAT applicable needs to be kept low since otherwise the VAT levied could be too high an amount. For such items, VAT is kept as low as 1%. Gold, silver and other precious stones as well as precious jewelry fall under this category of goods. Most Indian states have fixed VAT for these items at 1% of the amount.

  • 4-5% VAT Rate:

    A large number of daily consumption goods have been put by several state governments under this category of VAT. So VAT charged on goods like oil, coffee, medicines etc. is around 4-5% for most states in India.

  • General VAT Rate:

    General VAT rates apply to goods which cannot be segregated and put under any of the above listed VAT categories. For goods like liquor, cigarettes etc. many governments charge high VAT rates of 12.5% or 14-15%. Also, many state governments follow a general rate of VAT for goods which cannot be categorized to suit the above classification. Such goods are taxed at 12%, 13% or even 15% in different states.

Process of VAT Registration:

VAT registration is mandatory for enterprises that make a turnover of more than Rs.5 lakh by selling goods and services. All such enterprises are required to register in their respective states of operation. Registering for VAT is necessary for enterprises in order to start paying VAT. On registration, each trader is given a unique 11-didgit registration number which is used to for all communication regarding VAT and its filing.

  • Who should register for VAT?

    Any firm making a turnover of more than Rs.5 lakh per annum is required to register for VAT payment.

  • Documents required for VAT registration:

    Following is the list of documents that needs to be submitted while registering for VAT.

    • Copy of PAN card
    • Address proof of business
    • Proof of identity of promoters
    • Additional security deposit or surety
  • How much time does it take to register for VAT?

    Generally, state governments take around 15-20 days to complete the process of registration. This time may differ from one state to another.

Process of VAT Collection:

The process of collection of VAT can be safely categorized into two broad heads based on the method of collection of value added tax.

  • Account-based collection of VAT

    Under the account based method of collection, sale receipts are not used, instead tax is calculated on the value added. Value added is calculated as the difference between revenues and allowable purchases. Most countries do not use this method of computing and collecting VAT, however, Japan still uses this way for tax collection.

  • Invoice-based collection of VAT

    Under the invoice-based VAT collection, sale receipts or invoice is used to compute the corresponding VAT. Traders when they sell their goods and services offer invoice containing separate details of VAT collected. Most countries in the world today use the invoice-based method of VAT collection.

    Another way to categorize VAT collection is to classify it based on the timing of collection.

  • Accrual-based collection of VAT

    Accrual based collection matches the revenue with the time period during which it is earned and matches the cost of raw materials and expenses to the time period during which they were made. This method is extremely complicated as compared to the cash-based collection of VAT. However, it also throws substantial light on information about any business.

  • Cash-based collection of VAT

    Cash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash that is being handled instead of whether all the bills are paid. Whenever payment is received, that date is recorded as date of receipt of funds.

Why pay VAT when sales tax is already being levied by government?

VAT and sales tax work differently and hence are kept separate. While sales tax calculation is an easy process, VAT is a multi-level and a more complex form of tax. Sales tax is simply calculated as a percentage of the final selling price of goods and services and is levied from customers at the time of purchase of goods and services.

Some of the most striking points of differentiation between sales tax and VAT are listed below.

  • VAT is levied from both producers of goods and services as well as consumers while sales tax is entirely levied from customers
  • VAT is a complex taxation process because it is charged in multiple stages. Sales tax is a pretty straightforward and simple taxation procedure
  • VAT is a multi-stage tax levied at each step of production while sales tax is charged from customers at final purchase of goods or services
  • VAT places in a lot of checks and hence is more transparent and efficient while sales tax is easy to fiddle with
  • VAT collection places more burden on producers of goods and services which they might ultimately charge from customers, leading to increased financial burden on customers
  • VAT is more transparent and efficient as compared to sales tax and hence generates more revenue for the government than sales tax

VAT Returns:

VAT returns have to be filed by businesses that have an annual turnover that is Rs.5 lakhs or higher. VAT is payable on all goods and services that are domestic or imported. VAT returns can be filed traditionally by filling and submitting the requisite paperwork to the appropriate authorities. It can also be filed online if registered under VAT Act 2003 using the provided user id and password.

Frequently Asked Questions about VAT:

  1. Does the VAT that I pay as part of any purchase reach the government?

    Yes. Respective state governments are responsible for collection of VAT which is then passed on to the central government.

  2. Why does VAT on my television set vary in Uttar Pradesh as compared to that in Karnataka?

    VAT is subject to rules and guidelines of the state government and as such may slightly differ from one state to another, even for similar goods and services.

  3. Is VAT levied on certain basic necessities like salt, oil too?

    No. Many state governments in India have done away with the concept of VAT for certain necessary goods.

  4. Is the compliance rate of VAT better than sales tax?

    Yes. VAT since levied at every stage of production offers less chances of loopholes which can be exploited and as such is better in terms of compliance as compared to sales tax which is pretty easy to fiddle with.

  5. Does VAT enhance the cascading effect in taxation process?

    No. Rather it minimizes the chances of cascading effect by levying the required tax amount at each and every stage of production.

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Value Added Tax in different states across India

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