Blog || munim.in: Confused about VAT and CST, here is the solution #SalesTax #CompanyIncorporation

Sales Tax

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 Government
Central Sales Tax (CST) - Collected by Central Government

When 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 CST

Intrastate Trading – VAT

Interstate Trading – CST

Let 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 Rs 100. If the VAT for state A is 10 % then the total VAT amount for this transaction will be Rs 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 Rs 10 as margin for himself, the wholesaler will sell the product to retailer at Rs 110 so the tax for the wholesaler will be Rs 11 but he has to pay only Rs 1 as tax because the Manufacturer has already paid Rs 10 as tax to the Government. Now the wholesaler will provide tax certificate of Rs 10 and Rs 1 to the retailer.

If the retailer again keeps a margin of Rs 10 then the cost of the product for the customer will be Rs 120. So the VAT amount for this will be Rs 12. Now again as tax of Rs 11 has already been paid to the Government and retailer carries tax certificate of Rs 10 and Rs 1 both he has to pay only Rs 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 Rs 12 only.

	Value	Margin	VAT@10%	CST@8%	VAT Paid	Responsibilty
Manufacturer	Rs 100	inclusive	Rs 10	NA	Rs 10	Manufacturer
Wholesaler	Rs 100	Rs 10	Rs 11	NA	Rs 1	Wholesaler
Retailer	Rs 110	Rs 10	Rs 12	NA	Rs 1	Retailer
Total TAX Paid					Rs 12

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 Rs 100 and the CST is 8 % then the amount of tax is Rs 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 Rs 108 as input credit would not be available.

If the Wholesaler keeps margin of Rs 2 with himself then Cost + Margin at Wholesaler’s end will be Rs 110 and selling to the Retailer in State B. Adding 10 % VAT for the transaction the amount of tax for the Wholesaler will be Rs 11. Again if the Retailer keeps a margin of Rs 10 then Cost + Margin at Customer end will be Rs 120. VAT for this transaction @10% will be Rs 12 but as the Wholesaler has already paid Rs 11 as tax to the Government, Retailer will have to pay only Re 1 as tax.

	Value	Margin	VAT@10%	CST@8%	VAT Paid	Responsibilty
Manufacturer	Rs 100	inclusive	NA	Rs 8	-	Manufacturer
Wholesaler	Rs 108	Rs 2	Rs 11	NA	Rs 11	Wholesaler
Retailer	Rs 110	Rs 10	Rs 12	NA	Rs 1	Retailer
Total TAX Paid				Rs 8	Rs 12