2 Unit-4: CENTRAL SALES TAX ACT, 1956

Unit-4: CENTRAL SALES TAX ACT, 1956

CENTRAL SALES TAX ACT, 1956

Paper xxx, Business Tax Procedures and Management

Page No.

CHAPTER 1. Introduction 2 - 11

CHAPTER 2. Exemptions and exclusions form CST 12 -21

CHAPTER 3. Formulation of Principles for determining when a

Sale or Purchase of goods takes place in the course

of inter-State trade or commerce or outside a State

or in the course of Import or Export. 22 - 27

CHAPTER 4. Registration of dealers 28 - 33

CHAPTER 5. Levy and collection of tax and penalties 34 - 43

CHAPTER 6. Liability in Special Cases 44 - 46

CHAPTER7. Value Added Tax and its implication

2 Unit-4: CENTRAL SALES TAX ACT, 1956

2.1 CHAPTER 1 Introduction
CHAPTER 1
Introduction
The authority to impose sales-tax was given to the State Governments
under the Government of India Act, 1935 as a result of which different
provinces in the country enacted their sales-tax laws. Since the State
Governments were free to levy tax on the goods in any manner, they
exercised this power much to the detriment of the consumers and traders.
In most of the cases it was found that the rules were framed in such a way
that even the sales taking place outside the territorial limits of a State were
treated as sales within that State. There was great confusion about the
territorial limits of a State for the purposes of levy of sales-tax. In view of
this, sales-tax could be levied by more than one State on the same sale of
goods. This created enormous difficulties to the trading community and
ultimately to consumers also.
The Central Government was, therefore, urged to take necessary steps
to control this state of affairs through proper legislation. After consulting
the State Government and in pursuance of the recommendation of the
Taxation Enquiry Commission (1953-54), the Central Government amended
Article 286 of the Constitution in September 1956, with a view to imposing
certain restrictions on the States in matters relating to sales-tax.
It was in view of this authority provided by the amended Article 286 that the
Parliament enacted the Central Sales-Tax Act, 1956 which received the
assent of the President on 21 December, 1956. The Act was notified on 4
January, 1957, in the Official Gazette and came into force on 5 January,
1957, except Section 15 which came into force on 1 October, 1958. But the
Central Sales-Tax was imposed on those sales only which were effected on or
after 1 July, 1957. It extends to the whole of India. After studying this
chapter we will be able to understand:
(1) Levy of Central Sales Tax.
(2) Definitions used in the Act.
Extent and commencement of the Central Sales Tax Act
1956:
1. It extends to the whole of India.
2. It is divided into 6 chapters and 26 sections.
3. It makes provision for single point as well as multiple-point
tax.
4. Under this Act, the goods have been classified as :
(i) declared goods or goods of special importance in inter-
State trade or commerce, and
(ii) other goods.
The rates of tax on goods in the first category are lower as compared to the
rates of tax on goods in the second category.
5. There is no exemption limit for the levy of tax in relation to the
turnover of the dealer. Every dealer, who is having inter-State trade,
is liable to pay tax under the Act irrespective of the quantum of his
turnover.
6. Every dealer engaged in inter-State trade has to get himself
registered and the certificate of registration has to be displayed at
all places of his business.
7. The tax is levied under this Act by the Central Government but
it is collected by that State Government from where the goods have
been sold outside the State. The tax thus collected is given to the
same State Government which collected the tax. In the case of
Union Territories, the tax collected is deposited in the Consolidated
Fund of India.
8. The Act does not provide rules regarding submission of returns,
payment of tax, appeals, etc. For this purpose, the rules followed by
a State in respect of its own sale-tax law shall be followed for the
purposes of this Act also.
9. The Central Government and the State Government are
empowered to frame proper rules and regulations for the
implementation of various provisions of this Act

Objects of enacting the Central Sales-Tax Act

The Act has been enacted to formulate the principles regarding the
following :
(1) To formulate principles for determining when a sale or
purchase of goods takes place:
(i) In the course of inter-State trade or commerce; or
(ii) Outside a State; or
(iii) In the course of import into or export from India.
(2) To provide for the levy, collecting and distribution of taxes on
sales of goods in the course of inter-State trade or commerce.
(3) To declare certain goods to be of special importance in inter-
State trade or commerce.
(4) To specify the restrictions and conditions to which state laws
imposing taxes on the sale or purchase of goods of special
importance in the course of inter-State trade and commerce shall be
subjected to
Levy of Central Sales Tax
The Governments may after enacting suitable legislations, levy tax on the
transactions of the following nature:
(a) Transfer of property in goods (whether as goods or in any
other form) involved in the execution of a works contract;
(b) Delivery of goods on hire-purchase or any system of payment
of instalments;
(c) Transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment
or other valuable consideration;
(d) Supply of goods by an unincorporated association or body of
persons to a member thereof for cash, deferred payment or other
valuable consideration; and
(e) Supply by way of or as a part of any service of food (being
food or any other article for human supply) or any drink (whether or
not intoxication) for cash deferred payment or other valuation
consideration.
Further the Central Government has been empowered to levy tax on
the consignment of goods (to self or any other person), where such
consignment takes place in the course of inter-State trade or commerce.
The tax is levied on all sales of goods other than electrical energy
effected by a dealer in the course of inter-State trade or commerce during
the year.
Amendments in Central Sales Tax Act by the Taxation Laws
(Amendment) Act, 2007
The following important amendments have been made in-
1. On sales to the registered dealer, tax shall be charged @ 2%
instead of 4% or the rate applicable in the appropriate State,
whichever is less.
2. On sales to other dealers tax shall be charged at the rate
applicable to the sale or purchase of such goods inside the State
under the sales tax law of that State.
3. The Government shall be liable to pay tax at the same rate as
other dealers.
4. Now tobacco products have been deleted from the list of
declared goods. Hence, on such goods tax shall be levied at the rate
prescribed in the sales tax law of the State instead of maximum
4%.
Definitions
In this Act, unless the context otherwise requires,
(1) Appropriate State means-
[Sec2(a)]
(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 one or more places of business situated in
different States, every such State with respect to the place or places of
business situated within its territory. (2) Appropriate authority, in
relation to a company, means the authority competent to assess tax on the
company.
(3) Business includes-
[Sec2(aa)]
(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.
Manufacturing means change of one object into another for the purpose of
making it commercially marketable or when something is brought into
existence which is different from that original one.

(4)Crossing the customs frontiers of

India means- [Sec2(ab)] crossing the
limits of the area of a customs station in which imported goods or export
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.
(5) Dealer
[Sec2(b)]
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 cooperative society
or other society, club, firm, Hindu undivided family or other association of
persons which carries on such business,
(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.
Explanation 1-
Every person who acts as an agent, in any State, of a dealer residing outside
that State and buys, sells, supplies, or distributes, goods in the State or acts
on behalf of such dealer as-
(i) a mercantile agent as defined in the Sale of Goods Act, 1930, or
(ii) an agent for handling of goods or documents of the title relating to
goods, or
(iii) an agent for the collection or the payment of the sale price of goods or
as a guarantor for such collection or payment, and 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 whereof is
outside that State, shall be deemed to be a dealer for the purposes of this
Act.
Explanation
A Government which, whether or not in the course of business, buys, sells,
supplies or distributes, goods, directly or otherwise, for cash or for deferred
payment or for commission, remuneration or other valuable consideration,
shall except in relation to any sale, supply or distribution of surplus,
unserviceable or old stores or materials or waste products or obsolete or
discarded machinery or parts or accessories thereof, be deemed to be a
dealer for the purposes of this Act;

(6)Declared
Goods
[Sec2(c)]
Goods declared of special importance in inter-state trade under section 14
are known as declared goods. Tax on declared good within a State cannot
exceed 4% as per Sec15 (a) of CST Act. If sale of declared goods is made to
registered dealer in inter-state, CST rate will be local sales tax rate or 2%,
whichever is lower. If inter-state sale is made to unregistered dealer CST
rate will be equal to Vat /sales tax rate as applicable within the State.
However, State Vat rate cannot exceed 4%. U/s 14, the following goods have
been declared as goods of special importance in inter-State trade or
commerce:
 1. Cereals, i.e., paddy, rice, wheat, jowar, bajra, maize, ragi,
kodon, kutki, barley.
2. Coal including coke in all its forms but excluding charcoal.
3. Cotton all kinds of cotton indigenous or imported,
ginned or unginned, baled, pressed or otherwise but excluding
cotton waste.
4. Cotton fabrics.
5. Cotton yarn but excluding cotton yarn waste.
6. Crude oil, i.e., crude petroleum oils and crude oils obtained
from bituminous minerals.
7. Aviation Turbine Fuel sold to an Aircraft with a maximum
take-off mass of less than forty thousand kilograms operated
by scheduled airlines.
8. Hides and Skins, whether raw or dressed.
9. Iron and Steel.
10. Jute whether baled or otherwise.
11. Oilseeds.
12. Pulses - gram, arhar, moong, masur, urad, moth, khesari,.
13. Rayon or artificial silk fabrics.
14. Sugar.
15. Woollen fabrics.
16. Liquified petroleum gas for domestic use (LPG).
Reimbursement of local tax if declared goods sold inter-
State If any declared goods, on which Intra-State sale tax (i.e.
State sale tax) is paid, is sold in Inter-State sale; then the tax
levied on sale within the State should be reimbursed to the person
making such Inter-State sale [Section 15(b)]
However, (a) the inter State sale of goods must be in same form, (b) If Inter-
State sale of the goods are exempt from tax, refund of tax paid on Intra-
State sale is not available. (c) The word used is reimbursement. Thus, the
tax on local sale must have been paid.
(7) Goods includes-
[Sec2(d)]
All materials, articles, commodities and all other kinds of movable property,
but does not include newspapers, actionable claims, stocks, shares and
securities. e.g. electricity, copyright, and patent etc. are goods. The test to
determine that a property falls under the category of Goods is that the
concerned thing is capable of abstraction, consumption, and use and
whether it can be transmitted, transferred, delivered, stored, possessed
etc.
Examples of things those are not Goods:
Standing Trees As per section 2(7) of Sales of Goods Act, goods
include standing crop, grass and things attached to and forming part
of the land, which is agreed to be severed before sale or under
contract of sale. Standing trees are not goods and not taxable.
Electricity Electricity is movable property though it is not
tangible. It is goods.
Plant & machinery assembled at site is not goods Plant and
Machinery or structure assembled and erected at site cannot be
treated as goods for the purpose of levy of sales tax, if it is not
marketable and movable.
Newspapers are not goods for purpose of CAT Act and State
Vat Act Newspapers are really goods, but are specifically
excluded in view of entry No.92A of List I to Seventh Schedule to
Constitution of India (Union List) where newspapers are specifically
excluded from purview of tax on inter-State sales of goods. Entry 54
of List II (State List) authorizes States to levy tax on sale of goods
other than news papers only. Hence, newspapers are not goods for
purpose of CST Act and State Vat Acts.
Stock, shares etc. not liable Share certificates, securities like
debentures are not taxable under CST Act. Shares and securities
have been specifically excluded from definition of goods u/s 2(d) of
CST Act.
Lottery tickets Lottery ticket is actionable claim. Actionable
claim has been excluded from definition of good. Hence, lottery
ticket is not goods for purpose of levy of sales tax.
Trade mark Trade mark is intangible goods. Transfer of right to
use trade mark is deemed sale and consideration is taxable.
Advance Authorisation /DEPB are goods it has been geld
that DEPB has intrinsic value that makes it marketable commodity.
Hence it is goods. It is like prepaid meal ticket. If DEPB has to be
compared with a lottery ticket, it can only be compared with a
lottery ticket that has won the prize. The prize-winning lottery ticket
ceases to be a mare piece of paper having not value itself. It
acquires inherent value and becomes itself a thing of value.
Goods of special importance
Article 286 (3)(a) of Constitution of India authorizes Parliament to declare
some goods as of special importance and to impose restrictions and
conditions in regard to power of States in regard to levy, rates and other
incidence of tax on such goods. Parliament can restrict powers of state
Government to tax such declared goods. Section 2 (c) of CST Act defined
Declared Goods as those declared under section 14 of CST Act as goods of
special importance in Inter State Trade or commerce. Section 14 of CST Act
gives a list of such goods and section 15 specifies restrictions on power of
States to tax such goods
(8) Place of business includes -
[Sec2(dd)]
(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 account.
Central sales tax is collected by the Government of that State where the
Place of Business of the dealer is situated.

(9) Prescribed means prescribed by rules made under this Act.

(10) Registered dealer means a dealer who is registered under

section 7.

(11) Sale,
[Sec2(g)]
With its grammatical variations and cognate expressions, means any transfer
of property in goods by one person to another for cash or deferred payment
or for any other valuable consideration, and includes,
(i) a transfer, otherwise than in pursuance of a contract, of property in any
goods for cash, deferred payment or other valuable consideration.
(ii) a transfer of property in goods (whether as goods or in some other form)
involved in the execution of a works contract.
(iii) a delivery of goods on hire-purchase or any system of payment by
Instalments.
(iv) a transfer of the right to use any goods for any purpose (whether or not
for a specified period) for cash, deferred payment or other valuable
consideration;
(v) a supply of goods by any unincorporated association or body of persons to
a member thereof for cash, deferred payment or other valuable
consideration.
(vi) a supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human
consumption or any drink (whether or not intoxicating), where such supply
or service, is for cash, deferred payment or other valuable consideration,
but does not include a mortgage or hypothecation of or a charge or pledge
on goods
(12) Sale price
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.

Provided that in the case of a transfer of property in goods (whether as

goods or in some other form) involved in the execution of a works contract,
the sale price of such goods shall be determined in the prescribed manner
by making such deduction from the total consideration for the works
contract as may be prescribed and such price shall be deemed to be the sale
price for the purposes of this clause.
Inclusions in Sale price
Following items are includible-
Any sum charged for by dealer at or before delivery Sale
Price includes any sum charged for anything done by the dealer in
respect of goods at the time or before the delivery of goods. Thus,
sale price will include (a) Weighment charges charged for
weighing of goods at the time of delivery (b) Design charges in
respect of goods.
Taxes and duties on goods sold Sale Price is inclusive of taxes
and duties payable in goods sold, except in cases where the duty/
tax is statutorily recoverable from buyer. Thus, CST is payable in
excise duty, service tax and other taxes charged from customer.
Packing material and packing charges Sales tax is leviable on
packing material as well as packing charges (i.e. labour charges for
packing goods). Sales tax is leviable on packing charges, even if
shown separately.
Cost of fright Freight is not includible if charged separately,
Freight is includible only if (a) Freight is not shown separately in
invoice or (b) Contract is for sale For destination and property in
goods is transferred only at destination.
Exclusions from sale price
Following charges are not to be included for calculation of CST liability.
Cash Discount The cash discount for making timely payment is
not includible, as is clarified in section 2(h) itself.
Trade discount - Trade discount is deduction from list price to
wholesalers/ dealers cannot be considered for calculation of CST.
Such discounts may be given periodically at end of period.
Year end discount Quantity rebate allowed as discount by dealer
through credit notes at the end of the years as per scheme is
allowable as deduction.
Cost of installation and commissioning Cost of installation
and commissioning is not includible if shown separately in invoice,
as is clarified in section 2(h).
(13) Sales tax law
[S
ec2(i)]
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 includes
value added tax law, and general sales tax law means any 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 and includes value added tax law.

(14) Turnover
[Sec2(j)
]
Central Sales tax is payable on turnover of a period. Rate is determined as
per section 8, while turnover is determined as per section 2(j).
Turnover (often called taxable turnover) is defined under section 2(j) as
aggregate of the sale prices received and receivable by the dealer 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 provisions
of Central Sales Tax Act and Rules. Section 8A(1) states that in determining
turnover, deduction of sales tax should be made from the aggregate of sale
price. Prescribed period is the period in which sale tax return has to be
filed as per local sales tax law. Such period is usually quarterly, it is monthly
also in some States. The goods may be sold either on cash or on credit, or
the accounts may be maintained on cash system, the sale price of credit
sales shall also be included in the turnover.
The aggregate sale price i.e. total sale price for the prescribed period, is
assumed as inclusive of Central Sales Tax and backward calculation is made.
Thus, if aggregate of sale price is S and rate of tax R; turnover and tax
payable will be calculated as follows :
Turnover = 100 x S
100 + R
Tax Payable = S xR
100 + R
(15) Determination of turnover
[Sec8A]
The Central sales tax is levied on taxable turnover and not on gross
turnover.
In determining the turnover of a dealer for the purposes of this Act, the
following deductions shall be made from the aggregate of the sale prices,
namely: -
(a) Sale prices of the exempted goods.
(b) Sale prices of the goods exported outside India.
(c) Sale prices of the goods sold inside a State.
(d) Goods purchased and sold outside the State.
The balance shall be the sale prices of the goods sold in the course of inter-
state trade or commerce. From such sale prices after deducting the
following, the balance would be the taxable turnover (Sec8A).
(1) The sale price of all goods returned to the dealer by the purchasers of
such goods, the sale price of such goods shall be deducted-
(i) within a period of three months from the date of delivery of the goods, in
the case of goods returned before the 14th day of May, 1966,
(ii) within a period of six months from the date of delivery of the goods, in
the case of goods returned on or after the 14th day of May, 1966:
Provided that satisfactory evidence of such return of goods and of refund or
adjustment in accounts of the sale price thereof is produced before the
authority competent to assess or, as the case may be, re-assess the tax
payable by the dealer under this Act, and
(2)Such other deductions as the Central Government may, having regard to
the prevalent market conditions facility of trade and interests of consumers,
prescribe.
Amount of Sales-tax. If the amount of Sales-Tax is included in
the Sales prices such amount shall be deducted. If the amount of
sales-tax is not known, it shall be computed by the following
formula:
Rate of Tax x Aggregate of Sale Prices
100 + Rate of Tax
Where the turnover of the dealer is taxable at different rates, the
aforesaid formula shall be applied separately in respect of each part of the
turnover liable to a different rate of tax.
Filing of return of Turnover [Rule 11]
 The period of turnover in relation to any dealer liable to pay tax under
this Act shall be the same as the period in respect of which he is liable to
submit returns under the general sales-tax law of the State. Where he is not
liable to submit returns under the general sales-tax law of the State, the
period of turnover shall be a quarter ending on the 30 June, 30 September,
th th

31 December and 31 March in a financial year.

st st

Furnishing of certain declarations and certificates

The declaration in Form C or Form F or the certificate in Form E-I or E-II
shall be furnished to the prescribed authority within three months after the
end of the period to which the declaration or the certificate relates.
However, if the prescribed authority is satisfied that the person
concerned was prevented by sufficient cause from furnishing such
declaration or certificate within aforesaid time, he may allow further time
to furnish it. [Rule 12 (7)]
(16) Works
contract
[Sec(ja)]
A contract for carrying out any work which includes assembling,
construction, building, altering, manufacturing, processing, fabricating,
erection, installation, fitting out, improvement, repair or commissioning of
any movable or immovable property;

(17) 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.

2.2 THEORETICAL QUESTION

THEORETICAL QUESTION

Q.1. Define the following as per CST Act:

(a) Dealer, (b) Business, (c) Goods, (d) Sale, (e) Sale Price.

Q.2. How will you determine the taxable turnover under the C.S.T. Act?
Explain.
Q.3. Distinguish between sale and turnover. How would you determine
that turnover under the C.S.T. Act?

PRACTICAL PROBLEMS

Q.1. Aggregate sale price during July-Sept. 2010 was Rs.10,200 in Inter
Sale from Haryana. If the goods are sold within the state of Haryana, sales
tax rate is 12.5%. Buyer from Delhi issued declaration in form C. What is the
turnover and tax payable?

Ans: Since buyer has issued C form declaration, sales tax rate applicable is
2%

Turnover = 100 x10,200

100 + 2

Turnover = 10,20,000

102

Turnover = 10,000

Tax Payable = 10,200 x 2

100 + 2

Tax Payable = 20,400

102

Tax Payable = Rs.200

Thus, taxable Turnover is Rs.10,000 and tax payable is Rs.200.

Q.2. Aggregate Sale Price during OctoberDec. 2010 was Rs.10,400 in Inter
State sale from Haryana. If the goods are sold within the State of Haryana,
sales tax rate is 4%. Buyer from Delhi did not issue any sales tax declaration.
What is the turnover and tax payable?

Ans: Since buyer did not issue any declaration, sales tax rate will be 4%.
Hence, turnover is Rs.10,000 and tax payable is Rs.400.

Q.3. M/s Reliable Trades, Hyderabad, Andhra Pradesh, made sale of declared
goods W,X,Y, and Z, prior to 31-3-2011. Sales tax rate on these goods if sold
in Andhra Pradesh is respectively Nil, 2%, 3% and 4%. What will be CST rate
applicable for sale outside the State to (a) Registered dealers who issue
declaration in Form C. (b) Government who issued certificate in form D. (c)
Buyers who are not registered under CST Act and who do not issue any
declaration.

Ans. Position after 1-4-2010 will be as follows (a) In case of sale to

registered dealers, the rate is Nil, 2%, 2%, and 2% respectively (b) In case of
Inter State sale to unregistered dealers or Government. Sale tax rate will be
Nil, 2%, 3% and 4% respectively.

2.3 CHAPTER 2 Exemptions And Exclusions From CST

CHAPTER 2
Exemptions And Exclusions From CST
The Central Sales Tax Act provides for levy on Inter- State sales and also
defines what is Inter- State Sales. However, though it is called Central
Sales Tax Act, the tax collected under the Act in each State is kept by that
State only. After studying this chapter, we will be able to understand:
(1) Goods eligible to dealer at concessional rate.
(2) Rates of Central Sales Act.
Goods eligible to dealer at concessional rate
A dealer can purchase some goods at concessional rate @ 2% against C
form. All goods purchased by Registered Dealer are not eligible for
concessional rate, only those goods for which a dealer is eligible and which
are contained in his Registration Certificate are eligible for concessional
rate.
Section 8(3) of CST Act indicates the goods which a registered dealer can
obtain at concessional rate. Only those items can be incorporated in
Registration certificated issued to him. As per section 8(3), following goods
are only eligible for concessional rate-
(i) Intended for resale.
(ii) For use in manufacture or processing for sale
(iii) For use in telecommunications network
(iv) For use in mining
(v) For use in power generation /distribution, or
(vi) Containers and packing materials.
Rates of tax on sales in the course of inter-State trade or
commerce
(1) Every dealer, who in the course of inter-State trade or commerce-
(a) sells to the Government any goods; or
(b) sells to a registered dealer other than the Government goods of the
description referred to in sub-section (3), shall be liable to pay tax under
this Act, with effect from such date as may be notified by the Central
Government in the Official Gazette for this purpose, which shall be two
percent of his turnover or at the rate applicable to the sale or purchase of
such goods inside the appropriate State under the sales tax law of that
State, or, as the case may be, under any enactment of that State imposing
value added tax, whichever is lower.
Provided that the rates of tax payable under this sub-section by a dealer
shall continue to be four per cent of his turnover, until the rate of two per
cent takes effect under this sub-section.

(2) The tax payable by any dealer on his turnover in so far as the turnover or
any part thereof relates to the sale of goods in the course of inter-State
trade or commerce not falling within sub-section (1)-
(a) in the case of declared goods, shall be calculated at twice the rate
applicable to the sale or purchase of such goods inside the appropriate
State,
(b) in the case of goods other than declared goods, shall be calculated at
the rate of ten per cent or at the rate applicable to the sale or purchase of
such goods inside the appropriate State, whichever is higher, and,
(c) in the case of goods, the sale or, as the case may be, the purchase of
which is, under the sales tax law of the appropriate State, exempt from tax
generally shall be nil, and for the purpose of making any such calculation
under clause (a) or clause (b), any such dealer shall be deemed to be a
dealer liable to pay tax under the sales tax law of the appropriate State,
notwithstanding that he, in fact, may not be so liable under that law.
Explanation - For the purposes of this sub-section, a sale or
purchase of any goods shall not be deemed to be exempt from tax
generally under the sales tax law of the appropriate State if under
that law the sale or purchase of such goods is exempt only in
specified circumstances or under specified conditions or the tax is
levied on the sale or purchase of such goods at specified stages or
otherwise than with reference to the turnover of the goods.
(3) (i) The goods referred to in clause (b) of sub-section (1) are goods of
the class or classes specified in the certificate of registration of the
registered dealer purchasing the goods as being intended for resale by him
or subject to any rules made by the Central Government in this behalf, for
use by him in the manufacture or processing of goods for sale or in the
telecommunications network or in mining or in the generation or distribution
of electricity or any other form of power,
(ii) The goods referred to in clause (c) of sub-section (1) are containers or
other materials specified in the certificate of registration of the registered
dealer purchasing the goods, being containers or materials intended for
being used for the packing of goods for sale,
(iii) The goods referred to in clause (d) of sub-section (1) are containers or
other materials used for the packing of any goods or classes of goods
specified in the certificate of registration referred to in clause (b) or for the
packing of any containers or other materials specified in the certificate of
registration referred to in clause (c).

(4) The provisions of sub-section (1) shall not apply to any sale in the course
of inter-State trade or commerce unless the dealer selling the goods
furnishes to the prescribed authority in the prescribed manner-
(a) a declaration duly filled and signed by the registered dealer to whom the
goods are sold containing the prescribed particulars in a prescribed form
obtained from the prescribed authority, or
(b) if the goods are sold to the Government, not being a registered dealer, a
certificate in the prescribed form duly filled and signed by a duly authorised
officer of the Government.
Provided that the declaration referred to in clause (a) is furnished within
the prescribed time or within such further time as that authority may, for
sufficient cause, permit.

(5) Notwithstanding anything contained in this section, the State

Government may on the fulfillment of the requirements laid down in sub-
section (4) by the dealer if it is satisfied that it is necessary so to do in the
public interest, by notification in the Official Gazette, and subject to such
conditions as may be specified therein, direct,-
(a) that no tax under this Act shall be payable by any dealer having his place
of business in the State in respect of the sales by him, in the course of inter-
State trade or commerce, to a registered dealer or the Government from
any such place of business of any such goods or classes of goods as may be
specified in the notification, or that the tax on such sales shall be calculated
at such lower rates than those specified in subsection (1) or sub-section (2)
as may be mentioned in the notification.
(b) that in respect of all sales of goods or sales of such classes of goods as
may be specified in the notification, which are made, in the course of inter-
State trade or commerce, to a registered dealer or the Government by any
dealer having his place of business in the State or by any class of such
dealers as may be specified in the notification to any person or to such class
of persons as may be specified in the notification, no tax under this Act shall
be payable or the tax on such sales shall be calculated at such lower rates
than those specified in sub-section (1) or sub-section (2) as may be
mentioned in the notification.
(6) Notwithstanding anything contained in this section, no tax under this Act
shall be payable by any dealer in respect of sale of any goods made by such
dealer, in the course of inter-State trade or commerce to a registered dealer
for the purpose of setting up, operation, maintenance, manufacture,
trading, production, processing, assembling, repairing, reconditioning, re-
engineering, packaging or for use as packing material or packing accessories
in an unit located in any special economic zone or for development,
operation and maintenance of special economic zone by the developer of
the special economic zone, if such registered dealer has been authorised to
establish such unit or to develop, operate and maintain such special
economic zone by the authority specified by the Central Government in this
behalf.
(7) The goods referred to in sub-section (6) shall be the goods of such class
or classes of goods as specified in the certificate of registration of the
registered dealer referred to in that sub-section.
(8) The provisions of sub-sections (6) and (7) shall not apply to any sale of
goods made in the course of inter-State trade or commerce unless the
dealer selling such goods furnishes to the prescribed authority referred to in
sub-section (4) a declaration in the prescribed manner on the prescribed
form obtained from the authority specified by the Central Government
under sub-section (6) duly filled in and signed by the registered dealer to
whom such goods are sold.
Explanation - For the purposes of sub-section (6), the expression
special economic zone has the meaning assigned to it in clause
(iii) to Explanation 2 to the proviso to section 3 of the Central Excise
Act, 1944 (Sub-section1 of 1944).
Summary Of Rates Of Tax In CST-
The position w.e.f. 1-6-2008 is as follows:
In case of both declared goods and other goods [section 8(1) of CST Act in
respect of sale to registered dealer and section 8(2) of CST Act in respect of
sale to unregistered dealer
1. In case where local sales tax rate is 4% CST applicable in case
of sale to unregistered dealer will be only 4%. In case of sale to
registered dealers, the CST rate will be 2% w.e.f. 1-6-2008.
2. In case where local sale tax rate is 12.5%, CST applicable in
case of sale to unregistered dealer will be 12.5%. In case of sale to
registered dealers, the CST rate will be 2% w.e.f. 1-6-2008.
3. In case where local sale tax rate is 1 or 2%, CST applicable in
case of sale to unregistered dealer will also 1 or 2%. The rate will
be 1% even when sale to unregistered dealer is by transfer of
documents. In case of sale to registered dealer, the CST rate will be
1 or 2% as applicable to the goods within the State.
4. In case where local sales tax is Nil, CST applicable in case of
sale to unregistered dealer will also be Nil. In case of sale to
registered dealers, the CST rate will be Nil.
CST was expected to be reduced to 1% w.e.f. 1-4-2009. However, no
notification was issued. Hence, CST rate continues to be 2% (position as in
June 2010).
Exemption and Exclusions from CST
CST is leviable even if sale of goods inside a State is exempt from sales tax
in that State [Section 6(1A)]. However, this section is subject to other
provisions of CST Act.
Exclusions from CST Following transactions have been excluded from CST.
(a) Section 6(2) provides that no tax shall be payable in respect
of subsequent sales during movement of goods.
(b) Section 6(3) provides that no tax is leviable on supplies to
foreign diplomatic missions, UN, international organizations etc.
(c) Section 8(1) provides for lower /nil sales tax rate when sale
is to registered dealer/ Government.
(d) Provision to Section 6(1) provides that no tax shall be
payable when sale is penultimate to export as defined u/s 5(3).
(e) Section 8(6) states that no tax is payable if sale is to SEZ
developer and SEZ unit.
(f) Sale during export/ import is not taxable, as charging section
6(1) levies tax only on inter-State sale.
(a) Subsequent Sales by transfer of documents
CST Act envisages a single point levy at the first point of sale. Subsequent
sales during movement of goods by transfer of documents are exempt to
avoid multi-point levy of tax. The condition is that certificate in prescribed
form has to be obtained from seller who is a registered dealer.
Transfer to registered dealer The subsequent sale is exempt
only if it is made to registered dealer.
Transfer of documents of title Documents of title should be
transferred to subsequent buyer. Transfer is usually made by
endorsement, but such endorsement is for purpose of convenience
and easy proof only.
Certificate required Dealer selling the goods has to issue a
certificate in prescribed form to the purchasing dealer (E-I,E-II as
applicable). Subsequent purchaser also has to issue declaration in
prescribed form (C form). These certificates have to be produced to
sales tax assessing authority, within prescribed time. In absence of
such certificate and declaration, the subsequent sale will not be
treated as exempt [proviso to section 6(2)]. Declaration in C form is
not essential if sale of such goods is generally exempt from tax
inside the State or is generally subject to tax at less than 3%.
However, in such case, other satisfactory evidence has to be
produced that the sale is to registered dealer whose certificate of
registration entitles him to procure the goods in question [section
proviso to section 6(2)].
The certificates are E-I or E-II and declaration is in C form. These are to be
issued by buyer on quarterly basis.
Declaration in E-I and E-II forms The selling dealer has to
make declaration in E-I form if it is a first sale and in E-II form if it
is a subsequent sale.
Example: W dispatches goods from Karnataka to Orissa and raises invoice on
X in Madhya Pradesh, W charges 4% CST and pays the same in Karnataka.
During movement of goods, X sells goods to Y in West Bangal and Y
ultimately sells goods to Z in Orissa. Z takes delivery of goods and the
movement of goods comes to end. Sale from X to Y and Y to Z is by
transfer of documents. In this case, W will receive declaration in C form
from X and will issue declaration in E-I form to X. Later, X will issue
declaration in E-II form to Y and receive declaration in C form from Y.
Finally, Y will issue declaration in E-II form to Z and will receive declaration
in C form from Z, which will complete the chain. If the chain is broken,
CST will be payable again.
Z in
Orissa

Y in West
Bengal

X in
M.P.
W. in
Karnataka

C form C form C form

E-I form

E-II form E-II form

Lower rate if local sales tax rate is lower than 2%

As per section 8(1), CST payable in respect of sale to registered dealer is 2%.
However, if local sales tax rate is less than 2%, same (i.e. lower) rate will
apply in respect of sale to registered dealer. This provision is applicable
even in respect of sale to unregistered dealer, as per section 8(2) of CST
Act. If local sales tax rate is exempt or chargeable at rate lower than 3%,
subject to certain conditions which cannot be complied with by the
seller/buyer, the exemption /lower rate will not apply.
(b) Exemption from CST if sale SEZ unit or SEZ developer
Section 8(6), 8(7) and 8(8) of CST Act provide that inter-state sale made to a
unit in SEZ (Special Economic Zone) will be exempt from CST. Special
Economic Zone (SEZ) is set up for export purposes. Such zone is treated as if
it is a foreign territory within India. Units in SEZ can import inputs and
capital goods without payment of customs duty and procure indigenous
inputs and capital goods without payment of Excise duty.
(c) Exemption to supplies to foreign missions /UN etc.
No tax in inter- state sale shall be payable in case of sale to any official,
personnel, consular or diplomatic agent of (i) any foreign diplomatic
mission or consulate in India or (ii) the UN or any other similar international
body; entitled to privileges under any convention or agreement to which
India is a party, or under any law for the time being in force. The sale will
be exempt if such official, personnel, consular or diplomatic agent has
purchased the goods for himself or for purposes of the mission, consulate,
United Nations or similar international body.
(d) Sale in the course of Export
Section 5(1) of CST Act defines a sale or purchase is said to be in course of
export only if (a) the sale or purchases either occasions such export or (b) is
effected by a transfer of documents of tile to goods after the goods have
crossed the customs frontiers of India.
Penultimate sale for export
Export is a specialized business and many small units are unable to export
directly. Export is often effected through specialized agencies like Export
Houses etc., termed as Merchant Exporters under Foreign Trade Policy.
Such indirect exports also need exemption from taxes to make the products
competitive. Hence, such penultimate sale, i.e. sale preceding the sale
occasioning export is also deemed to be in the course of export under
section 5(3) of CST Act and exempt from tax.
Forms and declarations under CST
Some forms have been prescribed under CST Act. In some case, the dealer
has to issue declarations in prescribed form, to enable him to avail
concessions under CST Act. A dealer has to issue certain declarations in
prescribed forms to buyers/ sellers. These forms are prescribed in Central
Sales Tax (Registration and Turnover) Rules, 1957. Out of these forms, forms
C,E-I, E-II, F, H and I are printed and supplied by Sales Tax authorities.
Dealer has to issue declarations in the forms printed and supplied by the
Sales tax authorities only.These form are in triplicate.
As per Rule 12(7), declaration in form C and E-I/ E-II are required to be
submitted to assessing authority within three months after end of the period
to which it relates. STO can allow further time for submission of the form, if
dealer was prevented by sufficient cause from furnishing such declaration
within prescribed time [Rule 12(7) amended w.e.f. 1-10-2005. In case of
forms H, I and J, no time limit has been prescribed. Hence, submission at
any time before assessment should be sufficient, though some harassment
and demands cannot be ruled out on this issue. Wherever possible, it is
advisable to obtain and submit the forms on quarterly basis to avoid fruitless
litigation.
Form C and E-I/ E-II declaration is required to be obtained per quarter.
Hence, after end of quarter, within three months, the declarations should be
submitted to Assessing Authority.
In case of declaration in F form, it is required to be obtained monthly.
Hence, strictly legally, within months after end of the month, the F form is
to be submitted.
Prescribed forms under CST
Following are the forms prescribed under CST (Registration and Turnover)
Rues, 1957.

For Description Frequency

m
A Application for registration Once
B Certificate of Registration Once
C Declaration by purchasing registered To be obtained for
dealer to obtain goods at concessional every quarter and
rate submitted on
quarterly basis
D Form of certificate for making No question arises
government purchases (D form cannot after 1-4-2007.
be issued in cases of sale made to
Government on or after 1-4-2007)
E-I/ Certificates for sale in transit To be obtained for
E-II every quarter and
submitted on
quarterly basis
F Form by branch/ consignment agent Monthly, but to be
for goods received on stock transfer submitted to
authorities quarterly
G Indemnity bond when C form lost When required
H Certificate of Export Upto the time of
assessment by first
assessing authority.
I Certificate by SEZ unit Not specified in rules
(but should be
 submitted before
assessment.)
J Certificate to be issued by foreign Upto the time of
diplomatic mission or consulate in India assessment by first
or the UN Agency assessing authority.
Declaration in form C
As per section 8(1)(b) of CST Act, sales tax on Inter State sale is 2% or sales
tax rate for sale within the State whichever is lower, if sale is to registered
dealer and the goods are covered in the registration certification of the
purchasing dealer. Otherwise the tax is higher.
If the selling dealer pays CST @ 2% or lower (if applicable), he has to
produce proof to his sales tax assessing authority that the purchasing dealer
is eligible to get these goods at concessional rate. Otherwise, the selling
dealer will be asked to pay balance tax payable plus penalty as applicable.
Section 8(4)(a), therefore, provides that concessional rate is applicable only
if purchasing dealer submits a declaration in prescribed form C. Submission
of C form is mandatory and unless C form is submitted, concessional rate of
sales tax will not apply. It has been held that this procedure is designed to
prevent fraud and collusion, and facilitate administrative efficiency. Hence
it is mandatory. Concession can be denied if the form is not submitted.
Quarterly submission of C certificate One declaration in C
form can cover all transaction in one quarter, irrespective of total
amount /value of transactions during the year [rule 12(1) amended
w.e.f. 1-10-2005].
Duplicate C Form If C form is lost, the purchasing dealer can
issue duplicate declaration in C form with clear declaration in red
ink that this is a duplicate declaration in details of earlier certificate
number (which was lost) and of selling dealer has to be given. [This
will be necessary if both original copies of form i.e. Original and
Duplicate are lost].
2.13 CHAPTER7 VALUE ADDED TAX
CHAPTER7
VALUE ADDED TAX
Vat is basically a tax on sale of goods. Vat is payable by seller who is termed
as a dealer. Powers to levy sales tax are contained in seventh schedule to
Constitution of India. After studying this chapter we will be able to
understand :
(1) Meaning of VAT.
(2) The implications of VAT.
Background of Vat in India
Tax on sale within the State is a State subject. Over the period, many
distortions had come in taxation due to unhealthy competition among States
by giving sales tax incentives and tax rate war started to attract more
revenue to State. Many steps were taken to remove the distortions and
rationalize tax structure since 1999. It was decided to introduce uniform
State Level VAT. After lot of persuasion by Central Government, all States
ultimately agreed to introduce State Level sales tax VAT w.e.f.1-4-2005.
State-wise position of VAT
Haryana was the only State to introduce VAT w.e.f. 1.4.203. 20 States
introduced VAT w.e.f. 1.4.2005,these included Assam, Andhra Pradesh, Bihar,
Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal.
States ruled by BJP like Gujarat, Chhatisgarh, Jharkhand, Madhya Pradesh
and Rajasthan introduced Vat w.e.f. 1.4.2006.
Tamilnadu introduced Vat on 1.1.2007. Uttar Pradesh introduced Vat w.e.f.
1.1.2008.
Uttarakhand has not introduced VAT so far. J&K is out of picture of Vat due
to constitutional limitations.
Compromised VAT
The VAT system as being introduced is result of deliberations of committee
of representatives from 29 States. Each State has its own views and
peculiarities. Hence, having uniform nationwide VAT is very difficult and
some compromises/ adjustments are inevitable. This has happened while
introducing State VAT also.
Vat works best when there is uniformity in rate and variation in rates are
minimum. However, in State Vat, the variations in rates is much higher. Many
products (like petroleum products) are kept out of Vat regime. This is
incorrect as per Vat principles.
Exemptions should be minimum if Vat is to be implemented properly.
However, there are various exemptions in Vat regime in India e.g.
exemptions to SEZ/EOU, area based incentives etc. At present, there is no
credit of CST if inputs are purchased from outside the State. Similarly, if
goods are sent outside State on stock transfer basis, credit (set off) of tax
paid on inputs is available only to the extent of tax paid in excess of 2% e.g.
if tax paid on inputs is 12.5%, credit of 10.5% is available.
When CST rate is reduced to Nil, full credit of tax paid on inputs will be
available i.e. interState sales and despatches will be zero rated and not
exempt. Each State has made changes as per their needs. Though basic
concepts are same in VAT Acts of all States, provisions in respect of credit
allowable, credit of tax on capital goods, etc, are not uniform.
Basic concept of Vat
VAT woks on the principle that when raw material passes through various
manufacturing stages and manufactured product passes through various
distributions stages, tax should be levied on the Value Added at each stage
and not on the gross sales price. This ensures that same commodity does not
get taxed again and again and there is no cascading effect. In simple terms,
value added means difference between selling price and purchase price.
VAT avoids cascading effect of a tax.
Basically, VAT is multi-point tax, with provision for granting set off (credit)
of the tax paid at the earlier stage, thus, tax burden is passed on when
goods are sold. This process continues till goods are finally consumed.
Hence, VAT is termed as consumption type tax with destination principle.
VAT works on the principle of tax credit system.
Meaning of cascading effect of tax
Generally, any tax is related to selling price of product. In modern
production technology, raw material passes through various stages and
processes till it reaches the ultimate stage e.g., steel ingots are made in a
steel mill. These are rolled into plates by a re-rolling unit, while third
manufacturer makes furniture from these plates. Thus, output of the first
manufacturer becomes input for second manufacturer, who carries out
further processing and supply it to third manufacturer. This process
continues till a final product emerges. This product then goes to distributor/
wholesaler, who sells it to retailer and then it reaches the ultimate
consumer. If a tax is based on selling price of a product, the tax burden goes
on increasing as raw material and final product passes from one stage to
other.
For example, let us assume that tax on a product is 10% of selling price.
Manufacturer A supplies his output to B at Rs.100. Thus, B gets the
material at Rs.110, inclusive of tax @ 10%. He carries out further procession
and sells his output to C at Rs.150. While calculating his cost, B has
considered his purchase cost of materials as Rs.110 and added Rs.40 as his
conversion charges. While selling product to C, B will charge tax again @
10%. Thus, C will get the item at Rs.165 (150 +10% tax). In fact, value
added by B is only Rs.40 (150-110), tax on which would have been only
Rs.4, while the tax paid was Rs.15. As stage of production and /or sales
continue, each subsequent purchaser has to pay tax again and again on the
material which has already suffered tax. Tax is also paid on tax. This is
called cascading effect.
VAT avoids cascading effect of tax
System of VAT works on credit method. In Tax Credit Method of VAT, the tax
is levied on full sale price, but credit is given of tax paid on purchases.
Thus, effectively, tax is levied only on Value Added. Most of the countries
have adopted Tax credit method for implementation of VAT. E.g.
B will purchase goods form A @ Rs.110, which is inclusive of duty of
Rs.10. Since B is going to get credit of duty of Rs.10, he will not consider
this amount for his costing. He will charge conversion charges of Rs.40.00
and sell his goods at Rs.140. He will charge 10% tax and raise invoice of
Rs.154.00 to C. (140 plus tax @ 10%). In the Invoice prepared by B, the
duty shown will be Rs.14. However, B will get credit of Rs. 10 paid on the
raw material purchased by him from A. Thus, effective duty paid by B
will be only Rs.4. C will get the goods at Rs.154 and not at Rs.165 which he
would have got in absence of VAT. Thus, in effect, B has to pay duty only
on value added by him.
Advantage of VAT over conventional system of taxation
The advantage of consumption type VAT are as follows
(a) The tax burden is only at the last i.e. consumption stage.
(b) It becomes easier to give concessions to goods used by
common man or goods used for manufacture of capital goods
or exported goods and charge heavy duty on luxury goods.
(c) Administration control is easy due to credit method that
can be adopted.
 (d) It makes no distinction between capital intensive and labour
intensive activities. Tax avoidance by classifying capital goods
purchase as revenue purchase is avoided. This simplifies tax
administration.
(e) It is in harmony with the destination principle.
Simplicity and transparency. Simplicity is because there are
minimum variations in tax rates. Control is through transparent
audit system. Transparency is achieved as the total tax burden on a
product is as shown in invoice. There are no hidden taxes. Audit
system checks over dealers and ensures proper payment of taxes.
Reduction in tax evasion Tax evasion is reduced. Input credit is
available only if evidence of duty payment through invoice is
available. The buyer will not get input credit if sellers tax invoice is
not available. Thus, practically, buyer keeps a check on seller.
Disadvantage of consumption type of Vat
(1) All tax is collected in the State in which goods are finally consumed.
State in which goods are actually produced do not get any tax, while the
State Government has to provide infrastructure and other facilities for
production for which it has to spend huge amounts. This is the reason why
some States are insisting on imposing purchase tax in such cases, which is
obviously against the principle of consumption based tax.
(2) The States get indirect benefits like growth of employment, improved
economy etc. but no direct benefit of Vat/ sales tax.
(3)Tremendous paper work and record keeping in VAT. Vat system
can work only if record keeping is proper and reliable. The elaborate
record keeping is not possible to small businesses. Hence, an
exemption is granted to tiny businesses whose turnover is below
prescribed limits. In case of small businesses, a composition scheme
is provided where tax is paid on gross value of sales at a fixed rate.
Other related problems with VAT are:
Bogus Invoices on which tax credit is availed.
Acquisition fraud (Mission trader fraud).
Carousel Fraud.
Acquisition fraud The acquisition fraud is based on the fact
that goods imported are tax free. A dealer imports goods and makes
sale within the country. The dealer either has his own Vat
registration number or he hijacks others Vat number. He collects
the tax from buyer and then disappears without paying the collected
tax to the Government. The buyer is usually innocent and is not
aware that the seller is not going to pay tax to Government. This is
missing trader fraud of one type.
In Indian context, this fraud is possible when CST rate is Nil or is reduced to
1%. A dealer can purchase goods inter -state and makes sale within the
State. He will collect tax and then disappear. He may use someone elses Vat
number in his invoices or may himself get registered with address of some
rented premises.
Carousel fraud-Carousel means merry- go- around.This type of fraud
is difficult to trace. E.g. a dealer A imports goods without tax. He sells
goods to B and charges VAT. B avails credit of tax shown by A in his
invoice. B sells the goods to C and charges VAT. B has to pay only
differential amount as tax. C exports the goods and claims the refund of
input tax i.e. entire tax shown by B in his invoice. This is a valid
transaction. The missing link is that A actually does not deposit tax to
Government. Thus, C gets refund of tax which is not paid by A. By the
time Government traces the transaction to A, he has disappeared. The same
goods are used again and again for imports and exports. That is why the
fraud is termed as carousel fraud.
Non Availability Of Input Credit In Certain Cases
Credit or tax paid on inputs will be denied in following situations-
No credit if final product is exempt- Credit of tax paid on inputs
is available only if tax is paid on final product. Thus, when final
product is exempt from tax, credit will not be availed. If availed, it
will have to be reversed on pro rata basis.
Restricted credit if output goods are transferred to another
state If the final products are transferred to another state as
stock transfer or branch transfer, input credit availed will have to be
reversed on pro rata basis, which is in excess of 2%. In other
words, in case of goods sent on stock transfer/branch transfer out of
state, 2% tax on inputs will become payable e.g. if tax paid on
inputs is 12.5%, credit of 10.5% is available.
When CST rate is reduced to Nil, full credit of tax paid on inputs will be
available i.e., inter-state sales and stock transfers will be zero rated and
not exempt.
No input credit in certain cases- In following cases, the dealer is
not entitled to input credit-
(a) Inputs used in exempted final products
(b) Final product not sold but given as free sample
(c) Inputs lost/damaged/stolen before use. If credit was
availed, it will have to be reserved.
Broadly, the following purchases are not eligible for Vat credit-
(d) Final product is exempted from Vat.
(e) Inter-state purchases i.e. goods purchased from outside
the state
(f) Goods imported (obvious, since there will be no Vat
invoice)
(g) Goods purchased from unregistered dealer (as he
cannot charge Vat)
(h) Goods purchased from dealer who is paying Vat under
composition scheme (as he cannot charge Vat separately in
invoice)
(i) Purchase where final goods sold are exempt from tax
(j) Final product is given free i.e. goods not sold
(k) Inputs stolen/lost/damaged before use/sale as there is
no sale
(l) Proper Tax Invoice showing Vat separately is not
available
(m) Ineligible purchases like automobiles, fuel, certain capital
goods etc. as specified in relevant state Vat law i.e. items in
negative list.
No input credit if inputs lost, destroyed or damaged- Punjab
VAT Act provides that input credit will not be available if these are
lost, destroyed or damaged. In Bharat Petroleum Corporation v.
State of Punjab (2009) 19 VST 118(P&H HC DB), it was held that
this provision is consistent with scheme of the Act and valid. Credit
of tax paid on such inputs lost due to natural causes like
evaporation should be allowable.]
No credit on certain purchases- Generally, in following cases, credit is not
allowable-

Chapter 7- QUESTIONS

THEORETICAL QUESTIONS

Q.1. What is the meaning of VAT. When it is levied.

Q.2. How VAT helps in avoiding cascading effects of tax.

Q.3. What are the advantages and disadvantages of VAT.

PRACTICAL PROBLEMS

Q.1. Determine the taxable turnover, input tax credit and net Vat
payable by a works contractor from the details given below on the
assumption that the contractor maintains sufficient records to
quantify the labour charges. Assume Output VAT at 12.5%: (i) Total
contract price (excluding VAT) Rs.100 lakhs (ii) Labour charges paid
for execution of the contract Rs.35 lakhs (iii) Cost of consumables
used not involving transfer of property in goods Rs.5lakhs (iv)
Material purchased and used for the contract taxable at 12.5% VAT
(VAT included) Rs.45 lakhs. The contractor also purchased a plant
for use in the contract for Rs.10.4 lakhs. In the VAT invoice relating
to the same VAT was charged at 4% separately and the said amount
of Rs.10.4 lakhs is inclusive of VAT. Assume 100% input credit on
capital goods.

Ans. Vat on material purchased is Rs.5 lakhs (12.5% of Rs.40

lakhs). (It is presumed that Vat was shown separately in Invoice).
Vat on machinery is 0.40 lakhs. Thus, Vat credit available is Rs.5.40
lakhs.
The contractor will get deduction of labour charges of 35 lakhs and
consumable of 5 lakhs (Total 40 lakhs). Thus, he is required to pay Vat on Rs.
60 lakhs(100-40).

Vat on Rs.60 lakhs @ 12.5% is Rs.7.50 lakhs. He has Input Tax Credit of
Rs.5.40 lakhs.

Hence, he is required to pay balance Vat i.e. RS.2.10 lakhs by cash.

Que. 2. The particulars regarding sale, purchase etc. of Shubham

Udyog for the last quarter of the year 2010-11 are as under : (1)
Purchase of raw material within the state (i) taxable @1% - Rs.
40,00,000 (ii) taxable @ 4% - Rs.60,00,000 (iii) taxable @ 12.5%
-Rs.10,00,000 (2) Sale of goods manufactured from raw material
purchased @ 4% tax rate (i) Taxable sale within the State (tax rate
4%) Rs.20,00,000 (ii) Exempted sale within the state
Rs.10,00,000 (iii) Sale in the course of Inter-State trade or
Commerce (Tax rate 4%) Rs.10,00,000 (3) sale of raw material
purchased @ 1% tax rate Rs.44,00,000 (4) Goods manufactured
from the raw material purchased @ 12.5% tax rate were given on
lease. The deemed sale price of such goods is Rs.12,00,000, taxable
@ 12.5%. You may assume that input tax credit of tax on raw
material used in manufacture of leased goods is available
immediately. Compute the amount of Value Added Tax (VAT)
payable by M/s Shubham Udyog for the relevant quarter. There was
no opening or closing inventory. How can he utilize the balance of
input tax credit available, if any?

Ans. A. Output tax (VAT plus CST) payable (i) On raw material
(1% of Rs.44,00,000) Rs.44,000 (ii) On sale taxable @ 4% (4%
of RS. 20.00.000) Rs.80,000 (iii) Vat on lease (12.5% of
Rs.12,00,000) Rs.1,50,000 (iv) CST on inter-State sale (4% of
RS.10,00,000) Rs.40,000. Total tax payable Rs.3,14,000.

B. Input tax credit (ITC) (i) Taxable @ 1% (1% of Rs.40,00,000) Rs.40,000

(ii) Taxable @ 4% (Tax paid on Rs 60,00,000 2,40,000. Eligible credit 75% as
25% is exempt sale) - Rs.1,80,000 (iii) Taxable @ 12.5% (12.5% of
Rs.10,,00,000) Rs.1,25, 000. Total credit Rs.3,45,000.
C. Input Credit available is more than tax payable. Hence, no tax is payable
by cash. The excess credit of Rs.31,000 can be carried forward for
utilization subsequently. If such excess credit remains un-utilizable till the
time limit as specified in State Vat Act, then is will be refundable.

(Note: The excess credit is because goods purchases @ 4% were sold at a loss
by the dealer, as purchase price is Rs.60,00,000 and sale price is
Rs.40,00,000. Even then full ITC shall be available, as Vat provisions do not
require one to one relation. Total input credit is a common pool which can
be used for payment of Vat on sales. However, it shall be reduced
proportionately to extent of tax exempt sales).

Q.3. Mr. X, a trader selling raw material to a manufacturer of

finished products. He imports his stock in trade as well as purchases
the same from the local markets. Following transaction took place
during financial year 2010-11 : (1) Cost of imported materials (from
other State) excluding tax Rs.1,00,000 (2) Cost of local materials
including VAT Rs.2,25,000 (3) Other expenditure includes storage,
transport, interest and loading and unloading and profit earned by
him Rs.87,500.Calculate the VAT and invoice value charged by
him to a manufacturer. Assume the rate of VAT @ 12.50%.

Ans.On imported material, the trader does not get credit. On local material,
he gets Vat credit. The Vat paid on local material is RS.25, 000 (by back
calculation). Hence, his net purchase price of local material is Rs.2 lakhs.

Hence, his net selling price would be Rs.1,00,000 + Rs.2,00,000 + Rs.87,500

i.e. Rs.3,87,500. He will charge Vat @ 12.5% i..e. Rs.48,437.50. Thus, his
selling price to customer (inclusive of Vat) is Rs.4,35,937.500. Net Vat paid is
Rs.23,437.50(Rs.48,437.50 less Rs.25,000).

(Note that if the purchase price of local material is taken as Rs.2,25,000. his
actual profit will be higher than as indicated in the example)