Notes on Central Sales Tax (CST) and VAT

The Central Sales Tax (CST) is a levy of tax on sales, which are effected in the course of inter-State
trade or commerce. According to the Constitution of India, no State can levy sales tax on any sales or
purchase of goods that takes place in the course of interstate trade or commerce. Only parliament can
levy tax on such transaction. The Central Sales Tax Act was enacted in 1956 to formulate principles
for determining when a sale or purchase of goods takes place in the course of interstate trade or
commerce. The Act also provides for the levy and collection of taxes on sale of goods in the course of
interstate trade and commerce and to declare certain goods to be of special importance in the interstate
commerce or trade.

The central sales tax is an indirect tax on consumers. Though CST is a central levy, however it is
administered by the concerned State in which the sale originates. The seller or a dealer of goods in a
State has to collect State Sales Tax on the sale of goods within the State as well as central Sales Tax
on sales that takes place in the course interstate trade or commerce.

Central Sales Tax

Central Sales Tax is an integral component of the tax structure of the country, having been introduced
in the sixth Constitutional Amendment. 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.

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 (CST) is a tax on sales of goods levied by the Central Government of India. CST is
applicable only in the case of inter-state sales and not on sales made within the state or import/export
of sales. Inter-state sale is when a sale or purchase constitutes movement of goods from one state to
another. Accordingly, consignments to agents or transfers of goods to branch or other offices is not a
sale as per the CST Act CST is payable in the state where the goods are sold and movement
commences. The tax collected is retained by the state in which the tax is collected. CST is
administered by Sales Tax authorities of each state. Thus, the State Government Sales Tax officer
who assesses and collects local (state) sales tax also assesses and collects CST.

Sales Tax is a tax, levied on the sale or purchase of goods. There are two kinds of Sales Tax i.e.
Central Sales Tax, imposed by the Centre and Sales Tax, imposed by each state.

Central State Tax in India:

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. Central Sales Tax came into existence through an act of the parliament and
was enacted in the year 1956 to regulate sale of commodities and taxes regulating such sales.
Although CST is levied by the Central Government and falls under the Union List of the Seventh
Schedule, it is administered by the state in which a particular sale originates.

A trader dealing in goods which involve inter-state trade is expected to pay both the state sales tax and
the central sales tax on such transactions.
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 and declare certain goods as being essential and important for trade and commerce.

Establish which competent authority will settle interstate trade disputes.

Specify the restriction and conditions to which state laws imposing taxes on the sale or purchase of
such goods of special importance shall be subject.

Provides for collection of tax in the event of liquidation of a company.

Authority to settle disputes in course of interstate trade or commerce.

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.

Note: Goods that are sold within a state, but while transporting travel through another state is not
considered inter-state sales.

WHAT ARE THE CONDITIONS FOR CST ACT TO BECOME APPLICABLE?

1. The sale should not take place in the course of import into or export from India.
2. There should be a Dealer and such dealer must be registered under the CST Act.
3. He should made a sale to any buyer (registered dealer or unregistered dealer)

4. He should carry on any business.

5. He should made a sale of any goods (declared or undeclared)
6. The sale should be made in the course of interstate trade or commerce (i.e. the sale should not be a
sale inside a state.

RATE OF CST

In an inter-state sale to a registered dealer against form C the rate of CST is 4% or local sales tax rate
whichever is lower.

If under the local sales tax law, sale or purchase is exempt from CST the CST is Nil.

In an inter-state sale to government against form D the rate of CST is 4% or local sales tax rate
whichever is lower.

Rate of CST in case of inter-state sale of declared goods without form C or D is twice the rate of tax
applicable to the local sale or purchase of such goods in that state.

Rate of CST in case of other goods ( i.e. non-declared goods) is 10% or the applicable local sales tax
of that state, which ever is higher.

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.

The table below highlights the central sales tax rates for different scenarios.

Local Tax Rate Central Sales Tax Rate

When sale is to registered dealer

Goods exempt from local tax Nil

1% 1%

2% 2%

>2% 2% (form C required)

Central Sales Tax Exemptions:

Central Sales Tax is exempted on certain occasions, some of which are mentioned below:

Central Sales Tax is excluded if outward freight is charged separately and if the outward insurance of
goods are passed on to a buyer during dispatch.

No CST is to be paid if goods are returned within 180 days.

CST is exempted in cases when a sale within a particular state is exempt.

Any sale to SEZs and foreign missions are exempt from CST

Difference of Taxability:

Service Tax is a form of indirect tax imposed only on services provided. Service Tax is charged at the
time of rendering services, in normal circumstances. However, there may be a situation where service
tax is charged before rendering services or after completion of service. The important thing to note
here is the timing of chargeability and the rate of chargeability. Chargeability arises when services are
rendered, while the rate is determined at the time of payment by service receiver. Suppose when
services are rendered, the rate is 10.3% on such services. However, when the receiver makes payment,
the rate is 12.36%. So, the applicable rate is 12.36%.

On a different note, suppose when services are rendered, the service was under exempt category.
However, when the receiver makes payment, the rate is 12.36%. In that case, the applicable rate is
Nil, since chargeability did not arise at the time of rendering services, the services being exempt at
that time.

VAT (Value Added Tax) is a form of indirect tax imposed only on goods sold within a particular
state, which essentially means that the buyer and the seller needs to be in the same state. Only when
tangible goods and products are sold, VAT can be imposed.VAT (Value Added Tax) follows a
different practice of chargeability, where fulfilment the following conditions generate chargeability:

Existence of ‘goods’

Sale of ‘goods’

Within the state i.e. both the buyer and seller should be situated in the same state.

CST (Central Sales Tax) ) is a form of indirect tax imposed only on goods sold from one state to
another state, which particularly takes into account that the buyer and the seller needs to be in two
different states.CST (Central Sales Tax) runs parallel with VAT conditions, when it comes to
chargeability, except the third condition. The difference is as follows: From one state to another i.e.
the buyer and seller should be situated in two different states.

VAT (Value Added Tax)

VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the
change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of
the goods, added by the transferor. It is the tax in relation to the difference of the value added by the
transferor and not just a profit.

All over the world, VAT is payable on the goods and services as they form a part of national GDP. It
means every seller of goods and service provider charges the tax after availing the input tax credit. It
is the form of collecting sales tax under which tax is collected in each stage on the value added of the
goods. In practice, the dealer charges the tax on the full price of the goods, sold to the consumer and
at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers
from whom he purchased the goods and deposits such amount of tax in government treasury.

Method of Collection

There are two methods for collection of VAT in India. In the first method, tax is charged separately
on the basis of the tax which is paid on purchase, and the tax that is payable on the sale (shown
separately in the invoice). Therefore, the difference between the tax paid on purchase and the tax
payable on sale as per the invoice is the VAT.

In the second method, tax is collected and charged on the aggregate value of the tax payable on sale
and purchase, by applying the rate of tax applicable to the goods. Therefore, the difference between
the sale price and purchase price would be VAT.

In simple words, VAT = Output Tax – Input Tax

Now let’s see how Input and Output Tax are calculated:

Input VAT: Amount paid by a buyer as a percentage of cost price for goods/services used to make a
final product.

Say the Cost Price of a goods/services is = INR 100.

Assuming the VAT rate to be 12.5%,

Input VAT (VAT paid during buying) = INR 12.50

Output VAT: Amount received by a seller as a percentage of the selling price of the final product
Say the Selling Price of the Product is = INR 200

Output Tax (VAT collected during resale) = INR 25

VAT Payable:

VAT Payable = Output VAT – Input VAT= INR ( 25 – 12.50) = INR 12.50

VAT is therefore calculated by deducting tax credit from tax collected during the payment period.