What is Central Sales Tax?

Central Sales tax refers to the tax levied on sales generated during inter-state trade and
commerce in a country. In essence it is the tax one has to pay on the sale of goods which are sold
through inter-state trade. Central Sales Tax (CST) is an indirect, origin based tax on customers
and is payable in the state where a particular product is sold. CST is charged only on inter-state
transactions and any transaction within a state or import/export of goods does not fall under its
purview.

Central Sales Tax Act, 1956

Sales Tax in India falls under the ambit of Central Sales Tax Act, 1956, which extends to the
whole of India and defines the rules and regulations guiding sales tax. This Act was introduced
in the Sixth Constitutional Amendment and brought the taxes on sale/purchase of goods in inter-
state trade under the purview of the legislative jurisdiction of Parliament. This act came into
force in 1957 and forms the backbone for Central Sales Tax in India, containing various
provisions for the same.
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.

Objectives of Central Sales Tax Act:

The government introduced the Central Sales Tax Act in a bid to simplify and streamline tax
collection in the country. 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.

Central Sales Tax Rate:

Central Sales Tax rates are determined by the government and have changed since the time the
Act first came into force. The original Central Sales Tax rate was 1%, which was then increased
periodically to 2% and finally became 4% from July 1975 onwards. Goods which are extremely
important for inter-state travel are not taxed under certain provisions of the CST Act, ensuring
that essential commodities do not become dearer.
In 2007, an amendment to central sales tax rates was accepted, which saw the Sales Tax coming
down to 3% from the previously charged 4%.
 June 2008 witnessed a further reduction in the tax rate, with the rate coming down to 2%. A
major reason for the reduction in CST rates was the need to introduce Goods and Services Tax
(GST), which would make CST inconsistent with GST.

Central State Tax Rules:

There are certain rules which an individual participating in interstate trade is expected to adhere
to. Some of the major rules are mentioned below.
A dealer should submit an application (Form A) for registration under section 7 of the Act.
This application should be duly signed by the proprietor and verified by a competent authority.
Only a single application will be entertained even if an applicant has multiple places of
business in a state.
The certificate of registration should be kept at the principal place of business and copies of
the registration should be displayed at other business locations.
In case a registration certificate is lost or destroyed, the applicant should make a payment in
the form of court fee stamps to receive a duplicate copy.

Who is a Dealer?

The term dealer is defined under Section 2(b) of Central Sales Tax, 1956 (Act for short) as
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-

A Local Authority, a body corporate, a company, any co-operative society, or other

society, club, Firm, Hindu Undivided Family or other association of persons which
carries on such business;
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
An Auctioneer who caries 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 any principal or a nominee of the principal.

Section 6(1-A) of the Act provides that a dealer shall be liable to pay tax under this Act on a sale
of any goods effected by him in the course of inter-State trade or commerce notwithstanding that
no tax would have been leviable, whether on the seller or the purchaser, under the Sales Tax of
the appropriate State if that sale had taken place inside that State.
 How to get Central Sales Tax Registration?

A single inter-State sale of any amount effected by a dealer attracts tax liability under the
Central Sales Tax Act and consequential liability for obtaining certificate of registration. The
application for registration shall be made within 30 days from the date on which the first inter-
State sale is effected. However, the dealers registered under the State Sales Tax Act may get
voluntary registration under this Act even without effecting any transaction of inter-State sale.

Certificate of registration.-(l) An application for registration under section 7 shall be made by

a dealer to the notified authority in Form A and shall be- (a} signed by the proprietor of the
business, or, in the case of a firm, by one of its partners, or, in the case of a Hindu undivided
family, by the karta or manager of the family, or, in the case of a company by a direct~ ,
managing agent or principal officer thereof, or, in the case of a Government, by an officer duly
authorised by that Government, or, in the ase of any other. association of individuals by the
principal officer anaging the business, and (b) verified in the manner provided in the said
form.

(2) Where a dealer has more than one place of business within a State, he shall make a single
application in respect of all such places, name in such application one of such places as the
principal place of business for the purposes of these rules and submit such application to the
notified authority specified in respect of the principal place of business so named

The prescribed authority, to whom the application is made if satisfied that the application is in
conformity with the provisions of this Act and Rules made there under, shall register the
applicant and grant to him a certificate of registration in prescribed form.

Documents Required:
Individuals registering for CST need to furnish the following documents:
Government approved ID proof
Address Proof
PAN card
Photographs
Address proof of business establishment
Purchase invoice
Bank statement

ISSUE OF 'C FORMS

Dealers effecting sales in the course of inter-State trade shall obtain a declaration, in Form 'C,
from the purchaser of goods. The department shall issue such forms in triplicate to the purchasing
dealer. The purchaser should send two copies to the seller. The original is to be submitted by the
selling dealer to the authorities concerned, and the duplicate is to be kept in his record.
The purchasing dealer is required to get these forms from the prescribed authority under his seal
and signature. The dealer issuing the forms shall keep a record of forms used by him.

'C form declarations can be issued by dealers registered under the Central Sales Tax Act, in
respect of those goods only, which are included in the relevant list of their Registration Certificate
under the Central Sales Tax Act, for resale, for packing or for use in the manufacture or
processing of goods for sale, or for use in mining or for use in telecommunication network or for
use in the generation or distribution of electricity or any other form of power.

OFFENCES AND PENALTIES

Simple imprisonment up to six months or fine or both are provided for the following offences:

Furnishing false declarations/certificates;

Failure to get registered or to furnish security;
False representation, while purchasing goods, that the goods are covered by registration
certificate;
False representation about being a registered dealer;
Failure, without reasonable excuse, to use goods for the purpose certified in the C form
declaration;
Collection of Central Sales Tax contrary to S. 9A.

DECLARED GOODS

Section 14 covers the following items called declared goods which are subject to tax under a
State Sales Tax law at a rate not exceeding 4%. (The limit increased to 5%, vide Finance Act,
2011, w.e.f. 1st May, 2011).

These are:

Specific types of cereals (i.e., paddy, wheat, rice, jowar, bajra, maize, etc.), coal including coke in
all its forms but excluding charcoal, cotton, cotton fabrics, man-made fabrics and woollen fabrics
falling under certain headings in the Schedule to the Central Excise Tariff Act, 1985, cotton yarn,
but not including cotton yarn waste, crude oil even when subjected to certain processes, hides and
skins, whether in a raw or dressed state, certain types of iron and steel materials, jute, certain types
of oilseeds, certain types of pulses and sugar falling under certain sub-headings in the Schedule to
the Central Excise Tariff Act, 1985, Aviation Turbine Fuel sold to Turbo-Prop Aircraft and
sponge iron.

EXPORT-IMPORT

Transactions of export of goods outside India or import of goods from out of India are exempt
from tax. Sales/purchases effected by transfer of documents of title to goods before (in case of
import) or after (in case of export) the goods crosses the customs frontiers of India are also
exempt u/s. 5 of the Act. Further, sales to exporters selling goods directly to their purchasers in
other countries, against prior export orders are also exempt. A declaration, in Form 'H, is to be
obtained by the selling dealer from such exporters.

Cancellation of certificate

The registration certificate granted under this Act may be cancelled by the authority, if he is
satisfied, after due notice to the dealer to whom it has been granted, that he has ceased to carry
on business or has ceased to exist or has failed without sufficient cause, to comply with an order
or has failed to pay any tax or penalty payable under this Act or in the case of a dealer registered
has ceased to be liable to pay tax under the sales tax law of the appropriate State or for any other
sufficient reason. Before canceling the certificate the Authority shall give the dealer an
opportunity of being heard in the matter.

If the dealer desires to cancel the registration he shall apply not later six months before the end of
a year to the authority which granted his certificate of registration for cancellation of registration
along with certificate of registration and copies thereof. The Authority shall, unless the dealer is
liable to pay tax cancel the registration accordingly, and where he does so, the cancellation shall
take effect from the end of the year.

If the certificate of registration is cancelled, the dealer shall forthwith surrender to the notified
Authority the certificate of registration and the copies thereof, if any, granted to him.

Benefits of Registration

Branch transfer or stock transfer is exempt from tax by submitting Form F.

Avoid penalty or prosecution under the Act.
Concessional rate of tax on inter-state sale by using Form C.
Dealer can calim benefit by submitting form H under Sec 5(3).
No tax on purchase by a unit in special economic zone.

Important Definitions:

1. INTER-STATE SALE

An inter-state sale takes place when a sale or purchase:

Leads to movement of goods from one State to another State.

Is achieved by the transfer of documents of title while the goods are being moved from
one State to another State.

Example 1: A in Orissa sells and delivers goods to B in Gujarat.

Example 2: X in Orissa delivers goods to Y in Calcutta. Y sells it to C in Delhi by

transferring the document of title during the goods movement from Orissa to Delhi.
2. Goods include all materials, articles, commodities and all other kinds of movable property, but
do not include Newspapers, actionable claims, stocks, shares and securities;

3.Declared goods means goods declared under Section 14 to be of special importance in inter-
state trade or commerce.

4.Sale means any transfer of property in goods by one person to another for cash or deferred
payment or for any other valuable consideration.

5.Turnover used in relation to any dealer liable to tax under this Act means the aggregate of the
sale prices received and receivable by him in respect of sales of any goods in the course of inter-
State trade or commerce made during any prescribed period.

When is a sale or purchase of goods said to take place in the course of inter- State trade or
commerce?

A Sale or purchase of goods shall be deemed to take place in the course of inter-state trade of
commerce if the sale or purchase-

(a) occasions the movement of goods from one State to another or

(b) is effected by a transfer of documents of title to the goods during their movement from one
State to another.

When is a sale or purchase of goods said to take place outside a State

A sale or purchase of goods shall be deemed to take place inside a state if the goods are within
the State (a) In the case of specific or ascertained goods at the time the contract of sale is
made and (b) in the case of unascertained or future goods at the time of their appropriation to the
contract of sale by the seller or by the buyer whether assent of the other party is prior or
subsequent to such appropriation.

Forms for Declarations under CST Scheme

A registered dealer has to issue certain declarations in prescribed forms to buyers/ sellers.
The Dealer has to issuedeclarations in the forms such as C, E-I, E-II, F and H which are printed
and supplied by the Sales Tax Authorities. These forms are generally in triplicate.
 How is Turnover determined in CST Act?

Turnover [Section 2(j) of CST ACT, 1956]: It means the aggregate of the sale prices
received and receivable by any dealer liable to CST under this ACT in respect of any
goods in the course of inter-State trade or commerce made during any prescribed period
and determined in the prescribed manner.
Note:
Prescribed period is the period in respect of which a dealer is liable to submit returns
under the General Sales Tax law of the appropriate state
However, if a dealer is not liable to submit returns under the GST (General Sales Tax)
law of appropriate State (i.e. VAT Law now), such period shall be quarter ending
30 th June, 30 th September, 31 st December and 31 st March in a financial year, as the case
may be
In determining the turnover of a dealer for the purpose of this Act, the following
additions and deductions shall be made from the aggregate of the sale prices.

S.N. Additions

1 Packing charges (if not included)

2 Excise duty (if not included)

3 Insurance charges (if borne by seller prior to sale)

4 Weighing charges (if not included)

5 Dharmada charges

6 Design charges charged separately in respect of goods manufactured

7 Freight/Delivery charges from factory to depot (even shown separately in invoice)

S.N. Deductions

1 Trade/Cash discount (if not deducted)

2 Transport/Freight/Delivery charges (if shown separately)

3 Insurance charges (as per request of buyer after sale)

4 Installation Charges (if shown separately in invoice)

5 Trade Commission (if shown separately)

6 Deposit on returnable containers/bottles

7 Indemnity /Guarantee charges

8 Sale of goods exempted local sales tax

9 Intrastate sale

10 Government subsidies

11 Free cost of material supplied by customer

12 Sales returns (within 6 months from delivery)

13 Rejected Goods (Unfructified sale)

Note: The Taxable Turnover and CST is arrived at by applying the following formula

Taxable Aggregate sales including CST X 100

Turnover = 100 + Rate of CST

Rate of CST
CST = Aggregate sales including CST X
100 + Rate of CST
Difference between Central Sales Tax & Vat

BASIS FOR SALES TAX (CST) VAT

COMPARISONCENTRAL
VAT

1.Meaning Tax charged on the total VAT is a tax charged at each level of
value of the commodity, the production and distribution chain
when the sale takes place whenever the value is added to the
is known as Sales Tax product.

2.Nature Single point tax Multi point tax

3.Tax Evasion Can be possible Cannot be possible
4. Cascading effect Yes No
5. Levied on Total Value Value Added
6.Account Maintenance Requires less effort Proper accounts should be maintained
because it is simple and as it is comprehensive and complex to
easy to calculate. calculate.

7.Tax Burden Falls on the consumer Rationalized

8.Input Tax Credit Unavailable Available
9.Area Applies to the whole Applies within the jurisdiction of the
country state.
What is VAT?

A value-added tax (VAT) is a consumption tax levied on products at every point of sale where
value has been added, starting from raw materials and going all the way to final retail purchase
by a consumer. Ultimately, the consumer pays VAT; buyers earlier in the chain of production
receive reimbursements for previous VAT taxes paid.

Example of Value-Added Taxation

An example of a 10% VAT in sequence through a chain of production can occur as follows:
A manufacturer of electronic components purchases raw materials of metal from a provider. The
provider the seller at this point in the production chain charges the manufacturer of electronic
components $1 plus a 10-cent VAT, and then pays the 10% VAT to the government.

The manufacturer of electronic components adds value through its manufacturing process of
creating the components, which it then sells to a cellphone manufacturing company for $2 plus a
20-cent VAT. The manufacturer only remits 10 cents of the 20-cent VAT it collects to the
government, the other 10 cents reimbursing it for the VAT it previously paid.

The cellphone manufacturer adds value by making cellphones, which it then sells to a cellphone
retailer for $3 plus a 30-cent VAT. Ten cents of this VAT is paid to the government; the other 20
cents reimburse the cellphone manufacturer for the previous VAT it has paid.

Finally, the cellphone retail company makes a sale to a consumer for $5 plus a 50-cent VAT, 20
cents of which is paid to the government. The VAT paid at each sale point along the way
represents 10% of the value added by the seller.

Following are the advantages of VAT:

1. Easy to Administer & Transparent and Less Litigation,,

2. Deterrent against Tax Avoidance,
3. No Cascading(tax on tax) Effect
4. Minimum Exemptions,
5. As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax evasion
due to its catch-up effect.
6. VAT is transparent and has minimum burden to consumers as it is collected in small
fragments at various stages of production and distribution.
7. VAT is based on value added not on total price. So, price does not increase as a result of
VAT.
8. There is mass participation of taxpayers.

Disadvantages
Following are the disadvantages of VAT:

1. Refund of Tax (VAT credit) cannot be availed if no tax is payable on final product being
exempt or taxable at lower rate.)
2. VAT is costly to implement as it is based on full billing system.
3. VAT is relatively complex to understand. The calculation of value added in every stage is not
an easy task.
4. To implement the VAT successfully, customers, need to be conscious, otherwise tax evasion
will be widespread.