TAX

Tax is a financial charge or other levy upon a taxpayer (an individual or

legal entity) by a state or the functional equivalent of a state such that
failure to pay is punishable by law.

The term direct tax generally means a tax paid directly to the
government by the persons on whom it is imposed.

An indirect tax (such as sales tax, a specific tax [a tax per unit], value
added tax (VAT), or goods and services tax (GST)) is a tax collected by
an intermediary (such as a retail store) from the person who bears the
ultimate economic burden of the tax (such as the customer).
 Types of Taxes
In India Tax is regulated and administered by
the Ministry of Finance under the
Government of India. Taxation is the
government's main source of revenue and
several types of taxes are applied to different
categories of the population.
The following is a brief description of some of
the taxes that are levied in India by the
government:
 Income Tax: The Income Tax Act of 1961 stipulates that
any person who qualifies as an assessee and whose
gross income is more than the exemption limit is
required to pay Income Tax in accordance with the
rates indicated by the Finance Act.
Corporate Tax is the tax charged on the profits earned
by associations and companies by several jurisdictions.
The rate of Corporate Tax in India depends on whether
the profits have been passed on to the shareholders or
not.
Value Added Tax: This is the tax that a
manufacturer needs to pay while purchasing
raw materials and a trader needs to pay while
purchasing goods. VAT is eventually expected to
replace Sales Tax. All goods and services
provided by business individuals and companies
come under the ambit of VAT.
 Capital Gains Tax: A Capital Gain can be
defined as an, any income generated by selling
a capital investment (business stocks,
paintings, houses, family business, farmhouse,
etc.). The 'gain' here is the difference between
the price originally paid for the investment
and money received upon selling it, and is
taxable.
 Service Tax As per the Finance Act of 1994, all service providers in
India, except those in the state of Jammu and Kashmir, are required
to pay a Service Tax in India.
Fringe Benefit Tax: As per Section 115WB of the Finance Bill,
expenses incurred for employees, by an employer
(individual/company/local authority/trader) for purposes of
entertainment, gifts, telephone, clubbing, festivals etc., will be treated
as Fringe Benefits and will be taxed.
Sales Tax: a tax based on the cost of the item purchased and
collected directly from the buyer
Tax Planning is an application to reduce tax liability through the
finest use of all accessible allowances, exclusions, deductions,
exemptions, etc, to trim down income and/or capital profits.
 Tax evasion

It is the general term for efforts not to pay

taxes by illegal means
o An illegal practice where a person,
organization or corporation intentionally
avoids paying his/her/its true tax liability
 NEED FOR TAX PLANNING

1.It enables the assessee to make proper expense

planning, capital budget planning, sales promotion
planning.
2. It provides option to the taxpayer to avail of
incentives in the nature of exemption, deduction,
concessions, rebates and reliefs.
3. It aims at devising or adopting an arrangement so
as to bring about the least incidence of tax.
4. It is more reliable then tax evasion & tax
avoidance techniques.
5. High taxation leaves an assesse with lesser
money.
6. Every organization should aim at not
maximum profit but maximum after tax profits
which are possible only by proper tax planning.
 Corporate tax
A corporate tax, also called corporation tax or
company tax, is a direct tax imposed by a
jurisdiction on the income or capital
of corporations or analogous legal entities.
Corporation tax is a tax imposed on the net
income of the company.
Description: Companies, both private and public
which are registered in India under the
Companies Act 1956, are liable to pay corporate
tax.
 Corporate Tax Planning
The term "corporate tax planning" encompasses the strategic
structuring of business operations in order to minimize tax
liabilities.
Corporate tax planning activities generally seek to avoid legally
triggering tax costs rather than illegally evading an existing
obligation to pay taxes.
Tax planning represents a forward-looking activity, as opposed to
tax compliance or reporting, which reflects back on events that
have already taken place.
Corporations typically engage certified public accountants or tax
attorneys for technical advice in this complicated area.
Corporate tax planners design a blueprint for businesses to
minimize tax liabilities.
Objectives of Corporate Tax Planning
1. Reduction of Tax liability:
By proper tax planning, a tax payer may avail of
deduction and exemptions admissible to him
and thus tax burden could have been reduced to
nil.
 2.Health Growth of Economy:
A savings by legally sanctioned devices is the
prime factor for the healthy growth of the
economy of a nation and its people. An income
saved and wealth accumulated in violation of
law is the burdens on the economy where the
nations awaken in the atmosphere of peace and
prosperity.
 3.Productive Investment:
The tax laws offer large avenues for the
productive investment of the earnings by
granting absolute or substantial relief from
taxation
 4.Minimization of litigation
There is the greatest desire in the hearts of the
taxpayers to pay the taxes in the minimum and
sometimes overzealous tax administrators are
out to extract the maximum. This results in
unscrupulous litigation between the taxpayers &
tax collectors.
 5.Economic Stability
Avenues on productive investments are largely
availed by the taxpayers. The tax planning
thereby creates economics of the nation and
its people by even distribution of economic
resources
 Central Sales Tax, 1956
Constitutional Background

INDIA IS UNION OF STATES - Our Constitution generally follows

British pattern, though concepts of federal structure are borrowed
from American and other Constitutions.

India is a Union of States. The structure of Government is federal

(centralized) in nature. Government of India (Central Government) has
certain powers in respect of whole country.

India is divided into various States and Union Territories and each
State and Union Territory has certain powers in respect of that
particular State.
 Taxation under Constitution
In the basic scheme of taxation in India, it is
envisaged that
(a) Central Government will get tax revenue from
Income Tax (except on Agricultural Income),
Excise (except on alcoholic drinks) and Customs
(b) State Government will get tax revenue from
sales tax, excise on liquor and tax on Agricultural
Income
(c) Municipalities will get tax revenue from octroi
and house property tax.
 Excise Duty is an indirect tax levied and collected
on the goods manufactured in India.
Customs duty is a kind of indirect tax which is
realized on goods of international trade. In
economic sense, it is also a kind of consumption
tax. Duties levied by the government in relation to
imported items are referred to as import duty.
In the same vein, duties realized on export
consignments is called export duty
 Octroi (O. Fr. Octroyer, to grant, authorize) is a
local tax collected on various articles brought
into a district for consumption.
The Central sales tax Act 1956 was enacted by
the Parliament and received the assent of the
president on 21.12.1956.
 Objectives of CST
To formulate principles regarding when a sale or
purchase of goods takes place:
In the course of inter state trade
In the course of import/export trade
It aims to find out determination of taxable
turnover
It aims to find out Registration of dealers
It implies how and when central sales tax is
imposed
 Constitutes Of Sales Tax Act in India
According to S2 (g), a sale refers to any transfer of
property in goods by one person to another for cash or,
deferred payment or, for any other valuable
consideration. It also includes the following:
1. A sale or purchase of goods is said to take place when
the transfer of property in the existing goods or future
goods takes place for consideration of money.
2. The goods have been divided into different categories
and different rates of sales tax are charged for different
categories of goods.
3.In most of the cases related to the sales tax,
the tax on the sale or purchase of goods is at
single point.
4. Under the provisions of some state laws the
assesses are divided into several categories such
as manufacturer, dealer, selling agent etc. and
such as assess is required to obtain a
registration certificate to that effect
 What are goods?
Goods, for the purposes of the Act, include
the following:
Materials.
Articles.
Commodities.
 All kinds of movable property. (Movable
property is property, which is capable of being
lifted, carried, drawn, turned or conveyed or
in any way made to change place or position.
 Sales Tax In India
Sales tax is levied on the sale of a commodity
which is produced or imported and sold for the
first time. If the product is sold subsequently
without being processed further, it is exempt
from sales tax.
Sales tax can be levied either by the Central or
State Government, Central Sales tax department.
Also, 4 per cent tax is generally levied on all inter-
State sales. State sales taxes that apply on sales
made within a State have rates that range from 4
to 15 per cent.
 Sales tax is also charged on works contracts in
most States and the value of contracts subject
to tax and the tax rate vary from State to
State.
However, exports and services are exempt
from sales tax.
Sales tax is levied on the seller who recovers
it from the customer at the time of sale.
 Sales Tax in India is that form of tax which is imposed
by the government on sale/purchase of a particular
commodity within the country.
It is imposed under Central Government (Central Sales
Tax) and the State Government (Sales Tax) Legislation.
Normally, each state has its own sales tax act and levies
the tax at various rates.
Apart from sales tax, certain states also impose extra
charges such as works contracts tax, turnover tax &
purchaser tax. Thus, sales tax plays a major role in
acting as a major generator of revenue for the various
State Governments.
 The Central Sales Tax (CST) Act that comes under
the direction of Central Government takes into
consideration all the interstate sales of
commodities.
Hence, we see that sales tax is to be paid by every
dealer when he sells any commodity, during
inter-state trade or commerce, irrespective of the
fact that there may be no liability to pay tax on
such a sale of goods under the tax laws of the
appropriate state.
 Municipal/Local Taxes
Octroi/entry tax: Certain municipal
jurisdictions levy an Octroi/entry tax on the
entry of goods

Other State Taxes

Stamp
 Other State Taxes

Stamp duty on the transfer of assets

Property/building tax that is levied by local
bodies
Agriculture income tax levied by the State
Governments on the income from plantations
Luxury tax that is levied by certain State
Government on specified goods
 Who Pays Sales Tax In India?
Sales Tax i.e. the Central Sales Tax (CST) is an
indirect tax as it is recovered from the
buyers/consumers as a part of the consideration
for the sale of goods.
However, for the purpose of CST, the actual
payment of the Sales Tax is made by every dealer
on the goods sold by him in the course of inter-
state trade or commerce.
This tax is payable even though there may be no
liability to pay the tax on the sale of goods
according to the tax laws of that particular state.
Person Liable to Pay Central Sales Tax
Section 8(1) of the Central Sales Tax states
that every dealer who is in the course of inter-
state trade or commerce will be liable to pay
tax on sale of goods under this Act
 Central Sales Tax Act In Brief

It is a tax on sale
Though it is a Central Tax But it is collected and retained by the
State from where movement of goods commences
Sale of goods shall be deemed to take place in the course of
inter-State trade or commerce, if
Occasions the movement of goods; or
Transfer of documents of title during movement of goods
A sale within the State, which is not an inter-State sale or export
or import, is a intra-State sale
Tax generally depends upon location of goods That is, state
where invoice is raised is immaterial
WHAT ARE THE CONDITIONS FOR CST
ACT TO BECOME APPLICABLE.

1.The sale should 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
 Appropriate State
Sec. 2 : Defines (a) appropriate State means -
(i) in relation to a dealer who has one or more
places of business situate in the same State,
that State;
(ii) in relation to a dealer who has 3 places of
business situate in different States, every such
State with respect to the place or places of
business situate within its territory;
 Dealer
Section 2(b) of the CST Act defines the word
dealer. Dealer means any person who carries
on the business of buying, selling, supplying or
distribution of goods. The business could be
carried on either regularly or otherwise, either
directly or indirectly, either for cash or for
deferred payment or for valuable
consideration.
 Any person who is a dealer would be
liable to pay Sales Tax. The term dealer
includes:
local authority, a body corporate, a company, any
cooperative society, club, firm, Hindu Undivided
Family (HUF) or other Association Of Persons
(AOP) which carries on such business;
a factor, broker, commission agent, del credere
agent, or any other mercantile agent, by
whatever name called who carries on the
business of buying, selling, supplying or
distribution of goods belonging to any principal
whether disclosed or not; and
 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 principal.
 Declared Goods
DEFINITION: Section 2(c) of CST Act defines Declared Goods as those
declared u/s 14 of the CST Act as Goods of special importance in inter
state trade or commerce.
Section 14 gives the list of goods of special importance called
Declared Goods important among them are numerated as below:
(i) cereals i.e -paddy, rice, wheat,Jowar,bajra( ), maize
, barley etc.
(ia) coal, including coke in all its forms, but excluding charcoal:
(ii) cotton, that is to say, all kinds of cotton (indigenous or imported) in
its unmanufactured state, whether ginned or unginned, baled, pressed
or otherwise, but not including cotton waste;
(Coke is a fuel with few impurities and a high carbon content, usually
made from coal.)
 Objectives of CST ACT
The objective of the Act, is:
1.To formulate principles for determining:
(i) When a sale or purchase takes place in the
course of inter-state trade or commerce
(ii) When a sale or purchase takes place outside
a state.
(iii) When a sale or purchase takes place in the
course of imports into or export from India.
2. To provide for levy, collection 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
and specify the restrictions and conditions to
which state laws imposing taxes on sale or
purchase of such goods of special importance.
PRINCIPLES FOR DETERMINING PLACE
OF SALE OR PURCHASE
It is necessary to determine when a sale or purchase of
goods takes place in the course of inter-state trade in
order to impose central sales-tax.

1. IN THE COURSE OF INTER STATE TRADE

2. SALE OR PURCHASE OF GOODS OUTSIDE A STATE

3. SALE OR PURCHASE OF GOODS IN THE COURSE OF

IMPORT AND EXPORT
 1. IN THE COURSE OF INTER STATE
TRADE
Section 3 of CST Act defines a sale or
purchase of goods shall be deemed to take
place in the course of inter-State trade or
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.
 (a)Occasions the movement of goods
from one State to another
This means there is a completed sale in pursuance
of contract of sale or purchase where by goods
move from one state to another.
A sale can be treated as an inter- state sale if, all the
following conditions are satisfied.
1. Transaction is a Completed sale.
2. The contract of sale contains a condition for the
movement of goods from one state to another.
3. There should be physical movement of good
from one state to another
4. The sale concludes in the state where the goods
are sent and that state is different from the state
from where the goods actually moved.
5. It is not necessary that sale precedes the inter-
state movement of goods, sale can be entered
before or after the movement of goods.
6. It is immaterial in which state the ownership of
goods passes from seller to buyer.
Example:A in Orissa sells and delivers goods to
B in Gujarat.
 Illustrations

A of Delhi sells goods to B of Mumbai, As per

contract goods are to be delivered to Mumbai.
(It is a inter state sale as sale of occasion movement
of goods outside state.)
A of Delhi sells goods to B of Mumbai,Goods are
sold at As shop and B takes it to Mumbai.
(it is a local sale/ it is not interstate sale as sale
does not occasions movement of goods outside
state.
A of Delhi sells goods to B of Mumbai, As per
contract goods are to be delivered to Bs branch
in Delhi
( it is local sale and not interstate sale/hence
even the buyer is outside the state, sale is not
inter state sale if the goods does not move
outside the state.
 (b) Sale by transfer of documents
Section 3 (b)

If sale or purchase of goods is effected by

transfer of documents of title to the goods
during their movement from one state to
another then, such sale or purchase shall be
deemed to take place in the course of inter-
state trade.
 A Document of title to goods bears internal evidence of
ownership of goods by holder of document. Some of
the examples are Lorry Receipt (LR) in case of transport
by road; Railway receipt (RR) in case of transport by
rail, bill of Lading (BL)in case of transport by sea,
Airway bill (AWB) in case of transport by air.
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. WHEN IS A SALE OR PURCHASE OF
GOODS SAID TO TAKE PLACE OUTSIDE
A STATE.
(1) Subject to the provisions contained in
section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2)
to take place inside a State, such sale or
purchase shall be deemed to have taken place
outside all other States.
 Illustration
A of Kanpur sends goods to B of Delhi. The
Railway Receipt is sent by post to B while the
goods are in transit B sells goods by transfer of
documents to C of Bombay. In this case sale was
effected by transfer of documents of title to
goods (Railway Receipt) to the buyer when the
goods were in movements from Kanpur to Delhi.
2) 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.
 3. WHEN IS A SALE OR PURCHASE OF
GOODS SAID TO TAKE PLACE IN THE
COURSE OF IMPORT OR EXPORT?
The sale shall be deemed to take place in the
course of export or import:
Sale either occasions export (Called export sale) or
sale is effected by a transfer of documents of title to
the goods after the goods have crossed the customs
frontiers of India (Called deemed export sale)
(Sec.5(1)).
 Sale either occasions import (Called import sale) or
sale is effected by a transfer of documents of title to
the goods before the goods have crossed the
customs frontiers of India (Called deemed import
sale) (Sec.5(2)).
 Export - Movement of goods from a place in
India to a place outside India. Import -
Movement of goods from a place outside
India to a place in India.
 Practical issues in CST
1.Sales tax is a single point tax and there is no
sales tax on the further distribution channel
( Single Point taxation means imposition
of tax at only one point between the production
and the sale of goods to ultimate consumers.
The tax is levied at only one point between
the point of production (first point) and
the point of ultimate sale to consumption
(final point).)
2.In the sales tax structure, there were problems
of double taxation of commodities and
multiplicity of taxes, resulting in a cascading tax
burden.
 Cascading tax means
Tax paid on tax .
'Cascade Tax' A tax that is levied on a good at
each stage of the production process up to the
point of being sold to the final consumer
 Cascading effect- Shirt manufacturing
Action Cost 10 % tax Total tax
Mft Buys Raw 100 10 110 VAT
materials
Mft adds value 150 15 165 Excise
@40
Wholeseller 195 19.5 214.5 VAT
adds @30
Retailes adds 234.5 23.45 257.95 CST
@20
Total 190 67.95 257.95
3. It increases the tax burden on the ultimate
consumer.
4. Application of sales tax is restricted only for
goods. Under the cst act goods have been classified
as declared and declared goods. The rates of tax on
declared goods are lower as compared to the rate of
tax on goods in the second category.
5.Dealers of reselling goods have no responsibility to
collect tax and to file return is sales tax has already
been paid on reselling goods.
6. In sales tax there is a ample scope for tax
evasion.
7.Computation of sales tax is too much
complicated. The rate of central sales tax is 4 %
or local state whichever is lower on the first
point of interstate sale if, the goods are sold to
government or to registered dealer , sales
during the movement of same goods will be
exempted form tax.
8.Sales tax returns are filed separately and in
returns the dealers have to give numerous
details which invite scrutiny in detail.
9. Assessment of sales tax is entrusted to the
sales tax department.
10.There is no exemption limit of turnover for
the levy of central sales tax. It is applicable for
all dealers.
Apart form the above problems the systems of sales tax had
managed to nurture four other problems such as:
Tax exportation- The raising of revenue for one jurisdiction
through the levying of taxes on residents of another
jurisdiction
Overlap in the tax base
Tax competition among the state
Tax disharmony among the states- Among the
indirect taxes, sales taxes contributed over 56 percent of
total states' taxrevenues. ... Given that revenue from
sales taxes predominates in the states' fiscal operations,
understanding the nature of disharmony in the levy of
sales taxation is important.
Direct tax
Burden cannot be passed
Tax is paid directly to the
govt.
Tax is levied by the central
govt
Do not cause inflation
Bad for the rich and do not
affect the poor.
Indirect tax
Burden can be passed
Tax is paid indirectly to the
govt.
The tax is levied by both
central and state govt.
Causes inflation
Bad for the poor and partly
effects the rich.
 Types of tax
Direct tax: Indirect tax.
Custom (export
Income tax /import)
Wealth tax Excise-(Manufacturing)
Service tax.
Sales tax
 Sales tax

Sales Tax

LOCAL SALE INTER STATE SALE

(VAT) (CST) EXPORT/IMPORT
SALE WITHIN THE SALE FROM ONE STATE (NO SALES TAX)
STATE TO ANOTHER STATE
 INDIRECT TAX FOLLOWS EITHER OF
TWO PRINCIPLES
DESTINATION PRINCIPLE
It imposes taxes where
consumption tax places.
TamilNadu Kerala
Kerala collects tax since
consumption of goods is in
Kerala.
Customs, excise, service tax,
VAT follows destination
principle.
ORIGIN PRINCIPLE
Origin principle imposes
taxes where production
takes place.
TamilNadu Kerala
TamilNadu collects tax since
production is in TamilNadu.
CST follows origin principle.
 System of sales tax
Single point tax Multi point tax
Sales tax is levied only once Commodity is subjected to
throughout the whole sales tax as every stage at
channel of distribution. uniform rate.
It is classified into :
First point sales tax and
Last point sales tax.
 First point sales tax- it is levied when the
commodity is sold first time in the state.
Last point sales tax- it is levied only when
goods are sold either to the unregistered
dealer or consumer.
 First point sales tax
M D W R C

TAX LEVIED
 Last point sales tax.

M D W R C

TAX LEVIED.
 Multi point sales tax.

M D W R C

TAX LEVIED