Value Added Tax / CST in India

Value Added Tax

Tax is a compulsory contribution that is imposed by the government on the taxpayer for the services rendered in return by the same authority.It is a security taken by the government for which there is no exact amount decided in order to provide amenities to the people. Tax is there in every sector and therefore there are various types of taxes available. In this particular article the focus would be on VAT and CST tax.

VAT i.e. Value Added Tax is a multi-stage levied at each stage of value addition chain. VAT is levied to tax at every stage of sale where some value is added to the raw materials in order to make it a finished good. There is no ambiguity about double taxation as the taxpayers receive credit for the tax already paid in procurement of the stages. This aforementioned feature can also be called as an advantage as it is a multi-point tax with set-off for tax paid in purchases. This provides the government with the same revenue and lower rates. VAT is followed in over 160 countries and was introduced in the country to do away with the distortions in the earlier tax system. It is a form of indirect tax imposed on goods sold within a particular state. This tax can be imposed only on the tangible goods. All the states are provided with the plethora of rates ranging from 1 to 25 percentage. These taxes imposed by the states are governed by the respective state acts. VAT is basically a State subject, derived from Entry 54 of the State List Each and every state in the country has a separate and distinct VAT act reserved for their state which distinguishes their particular rates. The basic regime to levy VAT is, to multi-point levy on the price including value additions at each and every resale, the margins of either the re-seller or the manufacturer would be reduced unless the ultimate price is increased which would lead to the growth of the market to a one big open market rather than growth of large number of small markets. It is collected at every stage of the production and distribution. VAT registration is compulsory for dealers having turnover exceeding Rs. 5 lacks (or increased limit of Rs 10 lacks in some states). On the registration, every dealer is given a unique 11 digit Taxpayer’s Identification Number which is further how one is identified in the market. Taxes imposed under the name of VAT do not have any uniform rate. VAT follows a different practise of chargeability, where fulfilment of the following conditions generate chargeability:

  • Existence of ‘goods’
  • Sale of ‘goods’
  • Within the state, i.e. both the buyer and seller should be in the same state.

India, is a union of states and the strength of our country lies in its ability to handle these states collectively, which is where Central Sales Tax comes into play, by eliminating any confusion regarding inter-trade tax. Inserted in the constitution through Constitution (Sixth Amendment) Act, 1956 the taxes are allowed on sales and purchases of goods in course of inter-state trade or commerce. Central Sales Tax has been a major source of revenue for the government since its inception and is considered crucial in Indian trade and commerce. This amendment authorized Parliament to formulate principles for determining when a sale or purchase takes place in the course of inter-State trade or commerce or in the course of export or import or outside a State. Accordingly the Central Sales Tax (CST) Act, 1956 was enacted which came into force on 05.01.1957. Originally, the rate of CST was 1%, which was increased first to 2%, then to 3% and w.e.f. 1st July, 1975 to 4%. The CST Act, 1956 Act provides for declaration of certain goods to be of special importance in inter-State trade or commerce and lay down restrictions on the taxation of such items. This Act mentions the definitions of inter-state trade, situations where CST is applicable, penalties involved, important goods for interstate trade, trade restrictions, appeals and any other information which might be relevant.

Some of the main objectives of Central Sales Tax Act are mentioned below.

  • Provide provisions for levying, collecting and distributing taxes collected via interstate sale of goods and products.
  • Frame policies to determine when sale and purchase of goods occurs, with reference to interstate commerce.
  • Classifying certain goods as being essential and important for trade and commerce.
  • Establish which competent authority will settle interstate trade disputes.

The entire revenue accruing under levy of CST is collected and kept by the State in which the sale originates. The Act excludes taxation of imports and exports. CST being an origin based tax, is inconsistent with Value Added Tax which is a destination based tax with inherent input tax credit refund. Therefore Central Sales Tax are imposed when goods are sold interstate i.e. the seller and buyer should be in different states and doing business with each other. The registration of the same is not dependent on amount of turnover. In other words the registration of the dealer becomes compulsory once he affects an inter-state sale. The chargeability of the CST tax runs parallel to the VAT conditions, i.e. there should be existence of ‘goods’, there must be sale of ‘goods’ but the third condition deferrers in the form that the same should be from one state to another (the buyer and seller should be in the different states).

Author: This blog is written by Ms. Anmol Srivastava, student of Damodaram Sanjivayya National Law University, Visakhapatnam, a passionate blogger & intern at Aapka Consultant.

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