FAQ- VAT (Orissa)

FREQUENTLY ASKED QUESTIONS ON VAT

Qs.No.1. What is VAT?

Ans. Each commodity passes through different stages of production and distribution before finally it reaches the Consumer. Some value is added at each stage of the production and distribution chain. Value Added Tax (VAT) is tax on value addition at each stage. Under VAT system, a dealer collects tax on his sales, retains the tax paid on his purchase and pays balance to the Govt. Treasury. It is a consumption tax because it is borne ultimately by the final Consumer. The tax paid by the dealer is passed on to the buyer. It is not a charge on the dealer. Hence, VAT is a multipoint tax system with provision for set off of tax paid on purchases at each point of sale.

Qs.No.2. How is VAT computed?

Ans. The dealer pays VAT by deducting the tax paid on purchases (input tax) from his tax collected on sales (output tax). Hence, VAT = Output Tax – Input Tax. For example: A dealer pays Rs.10.00 @ 10% on his purchase price of goods valued Rs.100.00. He sells the goods at Rs.150.00 and collects tax amounting to Rs.15.00 (@ 10%). He will pay Rs.5.00 (Rs.15.00- Rs.10.00) as he has already paid Rs.10.00 to his seller while purchasing those goods.

Qs.No.3. Why VAT?

Ans. One of the major pitfalls of the present origin based Sales Tax system is cascading. Since there is no set off of tax paid on purchases, the tax paid on purchases gets embedded in cost price. For example: a Manufacturer purchases inputs / raw materials worth Rs.500.00 and pays tax of Rs.50.00 @ 10%. Since he is not getting input tax credit, he will add Rs.50.00 to the cost of inputs/ raw materials. If he adds Rs.450.00 towards his labour and service and other expenses to produce a commodity using the raw materials/ inputs which also includes his profit (value addition), the value of his product becomes Rs.1000.00. When he sells the product, he collects tax, say Rs.100.00 @ 10%, which contains Rs.50.00 tax collected on value of input which has already been taxed at the time of purchases, Rs.5.00 i.e. tax on tax of Rs.50.00 paid earlier. In this way, there is double taxation and tax on tax, resulting in cascading. The product may also be used as an input for manufacturing another product, further cascading. Cascading increases the cost of production and makes the product uncompetitive. Further, since the existing sale tax system is a tax on sale without provision for set off of tax paid on purchases, it discourages ancillarisation. Ancillarisation means getting most of parts/ components manufactured from outside. To avoid paying tax, the large manufacturers instead of buying parts/ components from outside, manufactures themselves. This discourages the growth of small scale industry and increases concentration of economic power. The system has also an adverse impact on quality of the product, further reducing the competitiveness of the goods.

Under VAT system, there is not only provision for set off of tax paid on inputs/ raw materials, but also for capital goods. Input tax credit/ set off of tax paid on purchases eliminate double taxation and cascading, this also reduces the cost of production. Since VAT is a consumption type of tax, the tax load to be borne by the consumer, the goods are exported free of any load of tax in the commodity by way of allowing input tax credit in case of goods sold in course of inter-state trade and commerce and exported out of the country. The goods exported with no load of tax in it can have competitiveness in the market. VAT will create an environment where industry will grow and ultimately help growth of economy.

Qs.No.4. How is VAT different from Sales Tax?

Ans. VAT will have only four rates instead of large number of rats of Sales Tax, with off setting of tax on inputs against that on output; VAT does away with tax on tax. Claiming input tax credit under VAT ensures proper invoicing. Overall, these features of VAT encourage disclosure of complete information on business turnover.

Qs.No.5. Who is to be covered by VAT?

Ans. All business transactions carried on within a State by individuals, partnerships, Companies, etc. will be covered by VAT.

Qs.No.6. Who will not be covered by VAT?

Ans. VAT will not cover small business with a turnover below a certain limit. In Orissa, a general trader having annual turnover of Rs.2, 00,000/- or more will be covered under VAT. The dealer, who purchases goods from outside the State for resale inside the State, or sells to outside the State, is liable to pay tax on his first transaction. The taxable limit for works contractor is Rs.50, 000/- and for manufacturer is Rs.1, 00,000/-.

Qs.No.7. What are the tax rates under VAT?

Ans. There are just four rates under VAT- the zero rate (exempted goods), 1%, 4% and a general rate of 12.5%. These rates will be uniform in all States across the country. The same set of goods will be charged at the same rates in all the States. Most essential commodities are exempt from VAT or fall in the category of 4%.

Qs.No.8. How does VAT help trade?

Ans. Uniform rates of VAT will boost trade, 100% self assessment will reduce the tax payer’s need to visit tax department officer.

Qs.No.9. How does VAT help industry?

Ans. The provision of set of tax paid on purchase/input tax credit will eliminate cascading and double taxation. This will promote production efficiency of investment. Investment decisions will not, therefore, be based on tax consideration, tax holidays.

Qs.No.10. How does VAT help exports?

Ans. The goods exported are zero rated under VAT. That means, the rate applicable to such transaction will be zero and the exporter will get full input tax credit. This will make the exports competition.

Qs.No.11. What is zero rating under VAT? How does it differ from exempt goods?

Ans. Zero rate is applicable to goods for certain transactions under VAT and input tax credit is available on those transaction. Under VAT, the goods exported outside India, sold to an EOU and to a dealer having business under a Special Economic Zone (SEZ), Software Technology Park (STP), Electronic Hardware Technology Park (EHTP) are zero rated. In these transactions the tax rate will be zero and input tax credit will be available. The propose is that the goods exported or sold to outside the State will be free of any load of tax in it, which will increase competitiveness and encourage exports. Exempt goods are those goods whose tax rate is zero, but input tax credit will not be available. Essential items such as agricultural implements manually operated or animal driven, books, periodicals, journals, fresh milk, etc. are in the exempted category.

Qs.No.12. Why are sales to SEZ, STP, and EHTP & EOU zero rated?

Ans. SET, STP etc. are being set up to promote industry and create industrial base. Sales to a unit under SEZ, STP, etc. are treated on a par with export. Hence, the goods sold to SEZ, STP are zero rated to encourage export.

Qs.No.13. VAT is a multipoint taxation system. Will it not escalate prices of the goods?

Ans. Input tax credit/ set off of tax paid on purchases will eliminate double taxation and cascading, thereby, it will reduce the cost of production. A dealer will not add the tax paid on purchase to the value of a commodity as tax paid is passed on to the buyer, ultimately to be borne by the consumer. In the existing sales tax system, sale price includes tax paid under the Act, but under VAT, sale price does not include tax paid under the Act. Hence, a dealer will not fix the sale price taking into account the tax paid on purchases. There is provision for set off of tax paid if the goods are exported or sold in course of inter-state trade and commerce. This is applicable to all the State’s VAT Law. For example, if a dealer has paid tax Rs.50.00 on his purchases of goods valued Rs.500.00, and adds value to the tune of Rs.450.00, under the sales tax system, he will sell the goods in course of inter-state trade at Rs.1000.00 + CST @4% (Rs.40.00). Under VAT, he will most likely sell the goods at Rs.950.00 + CST @ 4% (Rs.38.00) as he will get input tax credit of Rs.50.00. CST may be phased out completely within two years. Under VAT, a dealer in Orissa is likely to get the goods at Rs.988.00 instead of Rs.1040.00 and after two years, the goods will be available to the consuming state at Rs.950.00 instead of at Rs.1040.00.

Qs.No.14. Under VAT, value of goods and tax are mentioned separately on the invoice. Will not the buyer know the profit margin of a dealer?

Ans. No. The price of the goods the dealer sells and the tax charged are to be indicated in the bill separately. For example, a dealer sells a TV at Rs.10, 000.00 and charges VAT @ 12.5%, he will indicate in the tax invoice the price of TV i.e. Rs.10, 000.00 and tax @12.5% i.e. Rs.1250.00. It will not be known to the buyer at what price the dealer has purchased the goods.

Qs.No.15. The Gross Turnover for a general trader is only Rs.2, 00,000/- to be liable to pay VAT and get registered. What does it mean, Is it not low?

Ans. Under the existing OST Act, the gross turnover for a general trader to be liable to pay tax and get registered is also Rs.2, 00,000/-. The same taxable limit is kept under VAT. Gross turnover under OST Act means turnover of sales + turnover of purchases under section 3-B to be taxed on purchase turnover; the sale turnover of those goods (under Sec.3-B) are not taken into account while calculating gross turnover. Under VAT Act, gross turnover means turnover of sales plus turnover of purchases under section-12. In certain circumstances, some transactions are taxable on purchase turnover as per Section-12. The sale turnover of those transactions is not taken into account while calculating gross turnover. Moreover, under Sales Tax Act, turnover of sales includes tax paid under the said Act. But under VAT, the turnover of sales excludes the tax paid under VAT Act.

Qs.No.16. Tax rate applicable to different goods under the VAT Act are 1%, 4%, 12.5% and 20%. The goods which are not specified in the Act are taxable @.12.5%. Is it not too high?

Ans. Under the Sales Tax Act, the goods are presently taxed at the rates of 1%,4%,8%,12% and 20%. The goods like Petrol, diesel, liquor, narcotics etc. are presently taxed at 20%. The goods, which have not been specified, are presently taxed @.12%. Under VAT Act, the tax rates for different goods are taxable at 1%,4%,12.5% and 20%. The rate of 20% is applicable to goods like Petrol, diesel, liquor, narcotics etc. The goods, which have not been specified, are to be taxed @ 12.5%. The rates are uniform to all the states of India. Since the provision for set off of tax paid on purchases under VAT system will eliminate double taxation and cascading, this will most likely reduce the cost of production and prices of the commodities. Hence, 12.5% tax rate is not high, if we compare with the tax rates prevailing under Sales Tax Act, and take into account set off of tax on input cost.

Qs.No.17. There is provision of set off of tax paid on purchases. Will not the Govt. incur loss on account of introduction of VAT?

Ans. Sales Tax is a single point taxation system. For administrative convenience, most of the goods are being taxed at first point. Then, the goods are sold as tax paid, the Govt. does not get the tax on value addition at subsequent points of sale. Under VAT the revenue collected on the first point of sale is assured, then tax is collectible on subsequent points of sales of a goods. Under VAT there will be no incentives/ exemptions to industries. The loss of revenue on account of set off/ input tax credit will be made up by tax collectible on subsequent stages of sale and withdrawal of incentives. The Revenue Neutral Rate (RNR) has also been so fixed so as not to incur any loss on account of introduction of VAT. The Govt. of India will also compensate if there will be any loss in the initial years.

Qs.No.18. Some say, maintenance of accounts under VAT will be complicated. Will it not increase cost of compliance for the dealer?

Ans. Under the Sales Tax Act, a registered dealer is required to maintain (a) a true account of the value of goods bought and sold by him,(b) the books of accounts relating to his business (c) An annual account of the stock of goods purchased and sold by him showing the opening balance and the closing balance at the beginning and close of each accounting year. Besides, he is required to maintain accounts of forms such as Form-XXXIV and IPR related forms. Under VAT, there is no need of these forms; hence the dealer will not keep account of these forms. Under VAT, the dealer is required to maintain books of account similar to that of OST Act, so as to justify the claim of set off/ input tax credit etc. In comparison to the requirement under the Sales Tax Act, it is rather simple under VAT.

Qs.No.19. There is apprehension that under VAT, there will be much harassment by the Department Officers.

Ans. The apprehension is unfounded. Under VAT Act, steps have been taken to encourage voluntary compliance. A dealer will assess his own tax liability and pay the tax. He will not be assessed by the Department Officer as it is being done under OST Act. There is no renewal of registration certificate. Once a dealer is registered,, he will continue to be registered. A dealer will not come to the Office for getting his registration certificate renewed every year for assessment. There will be Audit based assessment. Selection for audit will be done on the basis of objective criteria. There will be no human bias in selecting a dealer for audit. Once selected, audit will be undertaken at dealer’s premises with prior notice. Audit will be taken up by a team, not by an individual. Audit visit report will be submitted to another Wing i.e. Assessment Wing. If there is material in the Audit visit report against the dealer, then assessment will be taken up. And notice of assessment will be issued along with supply of a copy of the Audit visit report. These are provisions under the Act and Rule so as to avoid harassment to the dealers by Department Officers. Twenty percent of the dealers will be selected on random basis for audit in a year. That means, if a dealer is paying tax regularly, there is no charge received from any quarter against him, he will be audited once in five year.

Qs.No.20. Some say prosecution provisions under VAT Act is very stringent. On slight mistake, a dealer can be sent to jail. How far is true?

Ans. This is not true. The procedure for prosecution under VAT Act is similar to that of OST Act. Like the provision under OST Act, no Court shall take cognizance of any offence except with the previous sanction of the Commissioner. No Court inferior to that of a Magistrate of the first class shall try the offence. Moreover, another safeguard is given under the VAT Act. The Commissioner will investigate an offence before giving sanction for prosecution. The offence & prosecution provision under the OST Act have not been abused by the Department Officers. The apprehension that the provision under the VAT Act that to, with additional safeguard, will be misused by Department Officer is unfounded.

Qs.No.21. What is output Tax?

Ans. This is the VAT you charge your customer when you are a taxable person making taxable sales. A taxable person is an individual, Partnership, Corporation, etc. who is registered under VAT. Persons who make taxable sales above the prescribed limit are required to register. When you are registered, VAT is chargeable on all the taxable sales you make. This is your output tax.

Qs.No.22. What is Input Tax?

Ans. The tax you pay on your purchases is input tax. Many of the things you buy will carry VAT charge, but if you are registered under VAT you can normally claim a credit for the VAT charges on most business purchases. It includes not only the VAT on your purchases of raw materials or on goods purchased for resale, but also the VAT on things like Capital goods, such as machinery or equipment for use in the business.

Qs.No.23. Can I always claim credit for my input tax?

Ans. Credit for input tax is allowed to registered dealers against tax paid in respect of sales or purchases made within the State. Input tax credit is allowed on goods if a registered dealer has purchased from registered dealers for the purpose of-a) sale or resale by him in the Stateb) use as inputs or as capital goods in the manufacturing or processing of goods [except in cases of negative list of goods, exempt goods and demerit goods such as liquor, petrol, narcotics, etc]c) sale to outside the State, Export, or sale to SEZ, STP, etc.d) for use as containers for packing of goodse) stock transfer to any place outside the State in excess of 4%.Input Tax credit shall not be allowedi) if goods are purchased for sale, but given away as free sample or giftii) to a dealer under composition schemeiii) in case of negative capital goods such as capital goods purchased prior to 1.4.05, capital goods not connected with the business of the dealer, etc.iv) against CST paid, or tax paid in any other Statev) in respect of stock of goods remaining unsold at the time of closure of businessvi) in respect of goods, which are not sold because of theft, damage or destructionvii) if invoice is not availableviii) if goods purchased from a dealer whose R.C. has been suspendedix) in case of exempt goodsx) in respect of schedule ‘C’ goods such as liquor, petrol, narcotics, etc.

Qs.No.24. What if I make exempt sales?

Ans. If you are making exempt sales as well as taxable sales, you may only be entitled to claim a credit for the part of input tax related to taxable supply. Input tax credit for exempt sales is not available.

Qs.No.25. What proof do I need to claim Input Tax?

Ans. You must have a copy of a Tax invoice to substantiate a claim for Input Tax credit.

Qs.No.26. How do I claim my Input Tax credit?

Ans. When you complete your VAT return for the month/quarter as the case may be, you can claim deduction for Input Tax credit against the VAT collected by you on your taxable sales. If the claim for Input tax credit exceeds the amount payable by you on the output in the return, the excess input tax credit will be carried forward to the next tax period/periods. The excess amount will be carried forward till it is adjusted or up to 24 months. After 24 months you can claim refund or opt for further carry forward. If you are an exporter, you will get refund of Input Tax on your purchases on month-to-month basis, on application.

Qs.No.27. Who has to be registered under VAT Act?

Ans. The following dealers have to be registered(I) A dealer whose gross turnover exceeds the taxable limit during a period of 12 consecutive months. Taxable limit in relation to a(a) dealer who purchases goods from or sells to outside the State is Nil(b) works contractor Rs.50,000/-(c) manufacturer Rs.1,00,000/-(d) general trader Rs.2,00,000/-(II) who is liable to be registered under Central Sales Tax Act(III) who is registered or liable to be registered under OST Act or CST Act(IV) The dealer who is registered under Orissa Sales Tax Act and his registration certificate is valid on the day before the appointed day is deemed to be registered under the VAT Act.A persons who intends to establish business for purpose of manufacturing or processing of taxable goods exceeding Rs.2 lakh in a year may take voluntary registration, even though his turnover does not exceed taxable limit

Qs.No.28. What is Gross Turnover?

Ans. Gross Turnover of a dealer is the turnover of sales plus turnover of purchases under Section 12 of the VAT Act. Section 12 provides the circumstances where tax is leviable on purchase turnover. In those cases, instead of sale turnover of the goods, purchase turnover is taken into account while calculating the gross turnover.

Qs.No.29. What is Taxable Turnover?

Ans. Taxable turnover means the turnover on which the dealer is liable to pay tax. Taxable turnover is determined after making the following deductions from the Gross turnover:(a) the turnover of goods exempt from tax(b) the turnover of sale of goods sold in course of inter State trade and commerce, to outside the territory of India, sold to a unit under SEZ, STP, EHTP or to an EOU.(c) All amounts allowed as cash discount, or trade discount(d) Cost of outward freight by a dealer for transportation of goods for the purchases.(e) In case of works contract, the expenditure incurred towards labour and service.

Qs.No.30. Who will come under composition scheme?

Ans. Composition scheme is for the small dealers/retailers. A dealer having gross annual turnover within Rs.10 lakh will come under composition scheme, provided- he is not a manufacturer- he neither purchases or receives goods from outside the State nor sells goods to outside the State and- ordinarily effects sales to consumers A dealer under composition will pay tax at a low flat rate on his taxable turnover and he will not avail input tax credit. If a dealer under composition scheme wants, he can become a VAT dealer on application, pay VAT and avail input tax credit. Small contractors can opt to be under the composition scheme. They will pay VAT at a low rate to be prescribed and will not avail input tax credit.

Qs.No.31. As a registered dealer under OST Act, I shall be deemed to be registered under VAT. What about my registration number? Will it remain the same?

Ans. Every VAT dealer will be allotted a Tax Identification Number (TIN) and the dealers under the composition scheme will be allotted small retailers Identification Number (SRIN). TIN is an 11 digit number, the first two given for State code; SRIN is a seven digit number, first two given for identifying the Circle. A dealer having business in more than one place in the State will be given one registration certificate and one TIN. He will display the registration certificate in his places of business.

Qs.No.32. Will there be renewal of certificate?

Ans. There is no provision of renewal under VAT Act. A dealer once registered will continue to be registered.

Qs.No.33. What will be the amount of security to be deposited under VAT Act at the time of registration?

Ans. Security is not mandatory under VAT Act; there will be no ritual of security. Only in cases, where there will be apprehension of loss of revenue, security will be demanded.

Qs.No.34. Will the provision of suspension of registration certificate be misused by the officers?

Ans. The Registration Certificate of a dealer will be suspended if a dealer contravenes the provisions of the Act or does not comply with the provisions of Act & Rules. Prior permission of the Commissioner is to be obtained before an officer suspends the registration certificate of a dealer. If the R.C. of a dealer is suspended, notice will be issued immediately and the dealer to produce the relevant documents to rebut suspension within 30 days from the date of suspension. If the dealer makes do the deficiency for which his R.C. was suspended, his R.C. will be restored.

Qs.No.35. How do I calculate my output tax when I am selling to consumers without separately showing the VAT?

Ans. For taxable sale, VAT charged to be indicated separately on the invoice. If tax inclusive invoice has been issued, the amount of VAT included in the value of the sales of the goods can be calculated by applying the tax fraction to the gross value of sales at each tax rate. Tax fraction is r in which ‘r’ represents the rate of tax applicable to the sale. r + 100

Q.No.36. What is a tax period?

Ans. A dealer is required to file return for a period, which is called tax period. A tax period is a month or a quarter. A quarter means a period of three months ending on 31st March, 30th June, 30th September and 31st December. For big tax payers, the tax period is one month and for small dealers a quarter. The Commissioner is to decide the tax period for a dealer.

Q.No.37. When is the dealer required to file return?

Ans. A dealer is required to furnish return within 21 days from the expiry of a tax period.

Q.No.38. What happens if a dealer discovers an omission after he has filed the return?

Ans. The dealer can file revised return before the date on which the return for next tax period becomes due.

Q.No.39. What happens when a dealer defaults in filing return?

Ans. In case of default, the dealer is required to pay interest @2% per month from the date the return was due to the date of payment.

Q.No.40. How will a dealer be assessed?

Ans. There is no regular assessment as in the OST Act. The dealer will assess himself for each tax period. He will calculate his output tax, deduct from it the input tax he has paid and pay the balance along with the return. The return will be accepted as assessed subject to adjustment of any arithmetical error apparent on the face of the return. If a dealer does not file return, provisional assessment will be taken up. If the dealer furnishes return along with producing evidence of payment of tax, the provisional assessment shall stand revoked. There will be audit based assessment.

Q.No.41. What is audit procedure?

Ans. Selection of dealers for audit will be done on the basis of risk parameters or on random basis. Twenty percent of dealers may be selected to be audited in a year. Audit will be undertaken at dealer’s premises with prior notice. Audit is to be done by a team. Audit Visit Report will be submitted with seven days from the date of completion of the audit. If there is material in the Audit Visit Report against the dealer, assessment will be taken up by officer of assessment wing. Notice for assessment will be issued along with a copy of the Audit Visit Report, so that a dealer can know in advance the charges against him and prepare his defence.

Qs.No.42. How can a dealer get his refund?

Ans. Refund flowing from an order shall be given to the dealer within 60 days from the date of receipt of the order. The dealer need not apply for such refund. In case of export, the dealer will make an application for refund. Refund will be granted to an exporter within 90 days from the date of application after an audit. The audit has to be completed within one month from the date of application. In case of delay, interest @ 8% per annum will be paid after 60 or 90 days as the case may be.

Qs.No.43 Appeal against an order will be entertained after full payment of admitted tax and twenty percent of the amount in dispute. Is it not unfair?

Ans. The amount of tax admitted by a dealer due to the Govt. should be paid in full. As discussed earlier, there is no regular assessment as in the OST Act. There will be audit based assessment. There is little scope for arbitrary assessment in the procedure to be followed for audit and audit based assessment. Abundant caution has been taken so that assessing authority can not act arbitrarily. If there is no material against the dealer in the Audit Visit Report, assessment will not be taken up. If there is some material in the Audit Visit Report, assessment will be taken up with prior supply of a copy of the Audit Visit Report to the dealer. Since there is little chance of arbitrariness in the assessment a dealer is required to pay 20% of amount in dispute for his appeal to be entertained along with payment of admitted tax in full.

Qs.No.44. Jurisdiction of the Act.

Ans. The VAT Act is applicable to the transactions made inside the State. However, the VAT Act has been prepared by the States taking into consideration the national consensus on the issues to bring in uniformity in all State Vat laws. Gradually State VAT will lead to emergence of an Indian common market.

Qs.No.45 How many countries have adopted VAT?

Ans. Now more than 130 countries including neighboring, Pakistan, Bangladesh, Nepal, Sri Lanka and China have adopted VAT.

Qs.No.46. Can VAT be successful in a federal country like India?

Ans. VAT has been successful in federal countries like Canada and Brazil. It is marvel to find States in Indian Union agreeing to a general consensus on critical points relating to VAT. States have agreed to a common tax rate. It is a land mark in cooperative federalism. States have shown keen interest in implementing VAT soon.

Qs.No.47. Why America has not accepted VAT?

Ans. In America there is retail sales tax which means tax is paid on the last consumer sale point, which includes all the value additions made in previous stages. VAT at each stage ensures flow of right tax at right time. It helps planning of income and expenditure.

Qs.No.48. What will be the fate of Sales Tax revenue under VAT in the State? Will there be any loss?

Ans. Ideally there should not be any loss on account of introduction of VAT. This has been evidenced from the experience of Haryana which had introduced VAT in the year 2003-04. Haryana had a sales tax growth of 15% during the year 2003-04. It also sustained the growth rate more vigorously during the year 2004-05. The growth till September is 29%. In the event of any loss of sales tax revenue on account of introduction of VAT, the Central Government will compensate the loss each month @ of 100% in the first year, 75% in the second year and 50% in the third year.

Qs.No.49. What is the methodology for calculation of compensation?

Ans. The year 2004-05 will be taken as the base year. Going backwards for five years, the average of 3 best years will be taken as the growth rate of the State. Taking the growth rate the sales tax which would have been collected during the year 2005-06 under the present regime will be calculated. The actual collection under the VAT regime will be deducted from the sales tax revenue which would have been collected under the OST regime to arrive at the loss.

Qs.No.50. What about CST Act and CST rate?

Ans. CST Act will continue. The present CST rate @ 4% will also continue for the year 2005-06. It will be gradually phased out.

Qs.No.51 What about the Entry Tax, Luxury Tax, Profession Tax and Entertainment Tax?

Ans. In Orissa Entry Tax is in lieu of Octroi. So it will continue and Empowered Committee had approved it. Luxury Tax will also continue but it may be subsumed in VAT later on. Profession Tax, Entertainment Tax will continue as those are not tax on sales.

Qs.No.52. Will there be any surcharge under VAT?

Ans. There will be no surcharge under VAT as it was under OST.

Qs.No.53. What about input tax credit on opening stock?

Ans. In put tax credit will be given in respect of the goods in the opening stock which were purchased within one year before the date of introduction of VAT. The dealers are required to furnish a statement of their opening stock within one month from the date of introduction of VAT. Input Tax credit on opening stock will be given within 6 months after 3 months from the date of introduction of VAT.

Qs.No.54. What about IPR exemptions and concessions?

Ans. Exemptions and concessions have been withdrawn in the VAT Act. Un-availed period of exemptions will be converted into deferrals.

Qs.No.55. What about sales to International Organizations?

Ans. There will be no tax exemption on sales to International Organizations but tax paid by them will be refunded.

Qs.No.56 Will there be input tax credit for capital goods?

Ans. There will be input tax credits on capital goods purchased from inside the State after introduction of VAT. Input tax credit on capital goods will be given within 36 months after commercial production and first sale. Input tax credit on capital goods costing less than Rs.1.00 lac will be given in lump sum.

Qs.No.57. What about CST Sales and Branch Transfers?

Ans. C.S.T. will be zero rated. It means there will be zero tax rates on C.S.T. sales. Input tax credit is available on C.S.T. sales. In case of branch transfer/consignment sale input tax credit is available in excess of 4%.

Qs.No.58. What is turnover of sales in course of import? ( Section-11).

Ans. The turnover of import (Sec.11 (2) (b) (iii) means the turnover of goods imported from out of the territory of India.

Qs.No.59. Whether declared goods will be subject to tax at single point or multipoint?

Ans. Declared goods will be subject to tax at multipoint. Section 15 of the CST Act has since been amended

Q.No.60. A registered dealer under VAT receives free medicine as quantity discount from a Company and resells the same in the State of Orissa. Whether he is liable to pay tax on the receipt value of such free medicines received?

Ans. No. But he is liable to pay tax on the sale turnover of such free medicines

Q.No.61. A branch of a company intends to establish business in Orissa for trading of medicine. Whether he will get registration after his taxable limit exceeds Rs.2, 00,000/- or he can be granted R.C. as an importer?

Ans. If the company receives or purchases stock from outside the state, it is liable to pay tax from its first sale in Orissa. The taxable limit for an importer is Nil. [Sec.10 (4) (a)].

Q.No.62.. A medicine whole seller purchases T.V. and refrigerator from the registered dealers of Orissa on payment of tax for distribution among doctors in connection with promotion of his sales. Whether he will be entitled to avail ITC?

Ans. No. [Sec.20. (8) (a)].In case of taxable purchases, when distributed free of cost, no input tax credit is available.

CST-WCT- PROCEDURE

Objects and Basic Scheme of the CST ActThe objects of the Act, as stated in preamble of the CST Act are - To formulate principles for determining (a) when a sale or purchase takes place in the course of inter-state trade or commerce (b) When a sale or purchase takes place outside a State (c) When a sale or purchase takes place in the course of imports into or export from India
To provide for levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce
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 (called as declared goods) shall be subject.
As explained later, * Entry 92A of List I (Union List) empowers Central Government to impose tax on inter-state sales * Article 269(3) and Article 286(2) of Constitution authorises Parliament to formulate principles for determining when the sale or purchase takes place outside a State or in the course of imports and exports. * Article 286(3) of Constitution authorises Parliament to place restrictions on tax on 'declared goods'. CST Act imposes the tax on inter state sales and states the principles and restrictions as per the powers conferred by Constitution.Basic scheme of the CST Act - The basic scheme of the CST Act is as follows.SALES TAX REVENUE TO STATES - The CST Act provides for levy on Inter-State sales and also defines what is ‘Inter-State Sale’. However, the concept that revenue from sales tax should be collected by States has been retained. Thus, though it is called Central Sales Tax Act, the tax collected under the Act in each State is kept by that State only. This is provided in Article 269(1)(g) of Constitution of India. - - CST in each State is administered by local sales tax authorities of each State. TAX COLLECTED IN THE STATE WHERE MOVEMENT OF GOODS COMMENCES - The scheme of CST Act is that Central Sales Tax is payable in the State from which movement of goods commences (i.e. from which goods are sold). The tax collected is retained by the State in which it is collected. CST Act is administered by Sales Tax authorities of each State. Thus, the State Government Sales Tax officer who collects and assesses local (State) sales tax also collects and assesses Central Sales Tax.TAX ON INTER STATE SALE OF GOODS - CST is tax on inter State sale of goods. Sale is Inter-State when (a) sale occasions movement of goods from one State to another or (b) is effected by transfer of documents during their movement from one State to another.STATE SALES TAX LAW APPLICABLE IN MANY ASPECTS - CST Act makes provisions for very few procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions of General Sales Tax law of the State applies.CST ACT DEFINES SOME CONCEPTS - Under the authority of Constitution, the CST Act defines concepts of ‘Sale Outside the State’ and ‘sale during the course of import/import’.DECLARED GOODS - Some goods are declared as goods of special importance and restrictions are placed on power of State Governments to levy tax on such goods.Inter-State and Intra-State Sale - Entry 92A of List I - Union List reads : ‘Taxes on the sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course of Inter-state trade or commerce’. Entry 54 of list II - State List - reads : ‘Tax on sale or purchase of goods other than newspapers except tax on Inter State sale or purchase’. Thus, sale within the State (Intra-State sale) is within the authority of State Government, while sale outside State (Inter-State sale) is within the authority of Central Government. Sale where both buyer and seller are from same State is Intra-State sale e.g. from * Mumbai to Pune or * Ahmedabad to Surat * Howrah to Kolkata * Mysore to Bangalore etc. These are Intra-State sales. However, when buyer and seller are in different States, it is Inter-state sales. e.g. : Chennai (Tamil Nadu) to Trivandrum (Kerala) * Allahabad (UP) to Hyderabad (Andhra Pradesh) * Bhubaneshwar (Orissa) to Daman (Union Territory) etc.NEWSPAPER SPECIFICALLY EXCLUDED - It can be seen that ‘newspapers’ are specifically excluded from purview of both Union as well as State list. The obvious reason is that newspapers have a very vital role to play in a democratic society. Freedom of speech and free flow of information is the backbone of democracy and hence newspapers have been excluded from tax. [Otherwise, ‘newspaper’ are ‘goods’, but for the exclusion].TAXABLE EVENT IN SALES TAX - In re Sea Customs Act - AIR 1963 STC 437= (1964) 3 SCR 827 (SC 9 member bench), it was held that in case of sales tax, taxable event is the act of sale. It is not a tax directly on goods.Categories of Sales - Sales can be broadly classified in three categories. (a) Inter-State Sale (b) Sale during import/export (c) Intra-State (i.e. within the State) sale. - Murli Manohar and Co. v. State of Haryana (1990) 4 CLA 304 (SC) = (1991) 80 STC 79 = 1990(2) SCALE 821 = (1991) 1 SCC 377 (SC 3 member bench). In this case, it was observed that they cannot conceive fourth category of sale.If sale or purchase to Marketing Agency is in same State, it will be an Intra-State sale even if goods are despatched outside the state as per instructions of the marketing agency. - ACC v. CST - AIR 1991 SC 1122.Tax on Inter-State sale is levied by Union (i.e. Central) Government while tax on Intra-State sale is levied by State Government of the State in which sale takes place. No tax is levied on sales during import or export.SALE WITHIN THE STATE IS ‘RESIDUARY SALE’ – As we will see later, ‘sale within State’ is residuary sale. Thus, first we have to decide if sale is ‘Inter State’. If not, we have to find if it is ‘Sale during export or import’. If not, then the sale is ‘Intra State’. Thus, if a sale is Inter State of during export or import, it cannot be ‘Sale within the State’.MODE OF A SALES TRANSACTION - Initially, buyer places an order on seller for supply of goods, called ‘Purchase Order’. After the goods ordered are ready, the buyer may come to the business place (godown, factory or warehouse) of seller and obtain delivery of goods. This will be ‘Sale within the State’. Alternatively, buyer may ask seller to send the goods by transport. In such cases, the seller will book the consignment by rail, road, ship or air as per requirement of buyer to the destination where buyer requires the goods. In such a case, generally, (a) if buyer and seller are in the same State, it is Intra-State sale (b) if they are in different States, it is Inter-State sale (c) if buyer is outside India, it is sale during export (d) if seller is outside India, it is sale during import.Recovery from customer is not essential for sales tax – Normally, sales tax is treated as indirect tax as it can be and is usually recovered from buyer. However, the liability to pay tax is on the dealer, whether or not he collects if from buyer.Background of CSTSales Tax is one of the most important Indirect Tax for purpose of taxation by State Governments. Revenue from CST goes to State from which movement of goods commences. Total CST revenue in 98-99 was Rs 8,538 Crores. Revenue of some major States was - Maharashtra - Rs 1,442 Crores. Tamilnadu - Rs 934 Crores. West Bengal - Rs 799 Crores. Gujarat - Rs 787 Crores, Haryana - Rs 739 Crores. [ET, Bom 21.7.2000].CST is proving to be a hindrance in introducing VAT. CST has been reduced to 3% (from 4%) w.e.f. 1-4-2007. It is announced that it will be reduced by 1% every year and made Nil by 1-4-2010.Recent Changes – Following are recent change in CST Law.12th May 2000 - Following changes were made vide Finance Act, 2000, effective from 12-5-2000.PROVISION OF INTEREST ON DELAYED PAYMENT - Section 9(2) and 9(2A) were amended to provide for recovery of interest for delayed payment of Central Sales Tax (CST). Section 9(2B) was inserted to provide that provisions in general sales tax law of each State relating to due date of payment of tax, rate of interest for delayed payment and assessment and collection of interest, shall apply to assessment and recovery of interest on Central Sales Tax also. As per section 120 of Finance Act, 2000, the provisions were given full retrospective effect. The word 'interest' was not present in section 9(2) earlier. In - India Carbon Ltd. v. State of Assam 1997(5) SCALE 51 = (1997) 106 STC 460 (SC) = 1997(6) SCC 479 = 1997 AIR SCW 3091 = 26 CLA 152 = AIR 1997 SC 3054 = (1998) 8 CC (Reports) 276 (SC), it was held that that interest for delayed payment cannot be levied on CST. (Since, there was no provision under CST Act). The section 9(2) of CST was amended with retrospective effect to nullify the effect of the judgment.11th September 2001 – Provisions in respect of Central Sales Tax Appellate Authority have been introduced by adding sections 19 to 26 w.e.f. 11-9-2001. The Appellate Authority has been constituted on 3-12-2001. - - However, the sections have not been made effective till April, 2003. 11th May 2002 - Substantial and far reaching changes have been made in CST Act, vide Finance Act, 2002. Some of these are made to facilitate introduction of VAT provisions in sales tax, while some are made to overcome difficulties created by some Supreme Court Judgments. Major changes made by Finance Act, 2002 are as follows -WIDENING OF DEFINITION OF SALE - Definition of ‘sale’ is amended by including (i) Transfer other that by contract (compulsory transfer) (ii) Goods involved in Works contract (iii) Transfer of right to use goods (like - leasing) (iv) Transfer among members of unincorporated association (v) Supply of food articles [Hire purchase was covered earlier also [New section 2(g)]. So far, there was no CST for inter state transactions of works contract, leasing or sale of food articles. Since there was no CST on leasing transactions, dealers were avoiding sales tax by showing transaction as ‘inter state sale’. Only lease agreement was executed in one State while goods were delivered in another State. Now, even if lease is held as inter state, CST will be payable.F FORM MADE MANDATORY TO PROVE STOCK TRANSFER - Submission of ‘F’ form to prove stock transfer made mandatory. If not furnished, the transfer will be treated as occasioned as a result of sale. [So far, stock transfer could be proved by other evidence also] [Amendment to section 6A(1)]CST RATE 3% OR LOCAL SALES TAX RATE WHICHEVER LOWER IF UNDER C FORM - Section 8(1) is amended to provide that rate of CST to registered dealer will be 3% or at the rate applicable for sale within the State, whichever is lower. Section 8(2) has been amended to provide that if certain goods are exempt generally from state sales tax, CST payable on such goods will be Nil, even if sold to unregistered dealer.RATE IF SALE TO UNREGISTERED DEALER - If general sales tax rate for sale within the State is less than 3%, the CST rate will also be less than 3%, if goods are sold to unregistered dealer (i.e. dealer who cannot furnish C form). [If the purchasing dealer can furnish H form, question of charging Central Sales Tax does not arise]. - - If local sale tax rate is Nil, same rate will apply in interstate sale to unregistered dealer. If local sales tax rate is more than 3%, the same rate will apply in respect of sale to unregistered dealer.MEANING OF ‘SALE EXEMPT FROM TAX GENERALLY’ - Explanation to section 8(2A) which defined the meaning of ‘sale exempt from tax generally if sold within the State’ has been transferred as explanation to section 8(2). It is transferred verbatim and there is no change.GOODS FOR TELECOMMUNICATION NETWORK CAN BE PURCHASED AGAINST C FORM - Section 8(3)(b) is amended to provide that goods meant for ‘telecommunications network’ can be purchased at concessional rate of CST on submission of form ‘C’.It may be noted that only goods used in telecommunications network will be eligible for purchase by registered dealer. Thus, telecommunication equipment not connected or associated with telecommunications network will not be eligible. Similarly, equipment used merely for servicing and repairs of telecommunication equipment may not be held as eligible.STATE GOVERNMENT CANNOT WAIVE CONDITION OF C/D FORM - Section 8(5) empowers State Government to reduce the sales tax rate applicable in Inter State Sale, by issuing a notification. This section has been amended to provide that such reduction can be given only after fulfilling conditions of section 8(4), i.e. on submission of C/D form. Section 8(5)(a) and 8(5)(b) are also amended to provide that the State Government can reduce CST rates only for sale to registered dealers / Government. Thus, reduction in CST rate made by State Government will apply only if sale is to registered dealer / Government. The lower rate will not apply if sale is to unregistered dealer (as he cannot provide C form). NO CST IF SALE TO SEZ - Sections 8(6), 8(7) and 8(8) have been incorporated to provide that inter state sale made to a unit in SEZ (Special Economic Zone) will be exempt from CST. The purchasing dealer has to submit a declaration in prescribed form. Consequential amendment is made by inserting section 13(1)(aa) to authorise Central Government to make rules to provide form and manner of furnishing declaration u/s 8(8). [CST Rule 12(10)(a) has have been subsequently amended on 16-1-2003. It is provided that SEZ unit will supply H form duly countersigned and certified by authority specified by Central Government authorizing establishment of unit in SEZ, - - Development Commissioner is the authority to allow setting up of SEZ unit]. PENAL PROVISION AMENDED - Penal provisions of section 10 are amended to make them applicable for declarations u/s 8(8) and purchases u/s 8(6) by SEZ units.TAX ON RE-SALE OF DECLARED GOODS PERMITTED - So far, local sales tax on declared goods could be charged only at one stage. Now, this restriction has been removed by deleting the words ‘and such tax shall not be levied at more than one stage’ from section 15(b). This amendment was necessary for introduction of VAT (Value Added Tax).14th May 2003 - Following changes have been made vide Finance Act, 2003 -EXEMPTION TO SUPPLIES TO FOREIGN MISSIONS/UN ETC. - Central Government can, by issue of notification, exempt (a) supplies made to officials or personnel of foreign diplomatic mission or consulate or UN or other similar international body entitled to diplomatic privileges (b) Supplies to consular or diplomatic agent of foreign mission or United Nations or similar international body. [section 6(3) inserted in CST Act].APPEAL TO APPELLATE AUTHORITY - Appeal to Central Sales Tax Appellate Authority can be made only if dispute u/s 6A read with 9 relates to sale of goods effected in inter-state sale. [Amendment to section 20(1)]. It is provided that Appellate Authority can call for records from assessing authority or relevant State Governments. These records will be returned to them as soon as possible. [amendment to section 21(1)]. It is provided that appeal shall not be rejected without giving opportunity of hearing to appellant, assessing authority and State Government concerned. [Amendment to section 21(3)]. Appellate Authority can grant stay of recovery of demand. [Amendment to section 23]. [Note that sections 19 to 26 have been brought into force w.e.f. 17-3-2005].10th September, 2004 – Following changes are made by Finance (No. 2) Act, 2004 – (a) Appeal will lie with CST Appellate Authority only in case of disputes u/s 6A read with section 9 of CST Act (b) Appellate Authority can grant stay and can order pre-deposit of tax before entertaining appeal (c) Supplies to SEZ developer will be exempt from CST.17-3-2005 – CST Appellate Authority has been constituted and provisions in respect of Appellate Authority have been made effective vide Notification No. SO 326(E) dated 17-3-2005.13 May 2005 – Following changes have been made by Finance Act, 2005 – (a) Definition of ‘works contract’ introduced (b) Provision made to issue rules for determining ‘sale price’ in case of sale of goods involved in works contract (c) ‘Sales tax law’ to include State VAT law (d) Form H made mandatory (e) Sale to diplomatic missions, UN etc. exempt only if prescribed certificate is produced (f) purchase of aviation turbine fuel by Indian carrier used for international flights will be ‘export’ and hence exempt from State sales tax.1-10-2005 – C and F forms to be submitted every quarter (till 30-9-2005, it was sufficient, if one C or D form is submitted for each financial year. The C, D, E-I/E-II and F forms should be submitted within 3 months from end of the period to which they relate. STO can allow late filing if the dealer unable to submit the forms within prescribed time.1-3-2006 – Appeal to CST Appellate Authority will lie only against highest Appellate Authority of the State [During 17-3-2005 to 28-2-2006, appeal was to be filed with CST Appellate Authority directly against order of assessing authority].18-4-2006 – LPG (liquid petroleum gas) for domestic use is added to list of ‘declared goods’ u/s 14 of CST Act to maintain tax rates at reasonable level.1-4-2007 - CST rate reduced to 3%. 'D' form abolished. Tobacco products removed from list of declared goods.Constitutional BackgroundINDIA 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 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. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.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.Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.Article 246 of our Constitution indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].Union List relevant to taxation - List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :ENTRY NO. 82 - Tax on income other than agricultural income.ENTRY NO. 83 - Duties of customs including export duties.ENTRY NO. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.ENTRY NO. 85 - Corporation Tax.ENTRY NO. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.ENTRY NO. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.ENTRY NO. 97 - Any other matter not included in List II, list III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.) State list pertaining to taxation - State Government has exclusive powers to make laws in respect of matters in list II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:ENTRY NO. 46 - Taxes on agricultural income.ENTRY NO. 51 - Excise duty on alcoholic liquors, opium and narcotics.ENTRY NO. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi or Entry Tax).ENTRY NO. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.Restrictions on powers of taxationRestrictions on power of State Government on imposition of tax on sale or purchase of goods are provided in Article 286 of Constitution of India, as follows : State Government cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the State. [Art 286(1)]
Parliament is authorised to formulate principles for determining when a sale or purchase takes place (a) outside the State (b) in the course of import and export. [Article 286(2)]
Parliament can place restrictions on tax on sale or purchase of goods declared as goods of special importance and State Government can tax such declared goods only subject to these restrictions [Article 286(3)].
Under these powers, CST Act has defined the terms ‘sale outside a State’ and ‘sale during export/import’. Provisions for ‘declared goods’ have also been made in the CST Act.No restriction on Inter-State Trade and Commerce - Each State and Union Territory has certain autonomy. However, the trade and commerce has to be free all over India, without which India cannot be ‘One Nation’. As we saw above, tax on Inter-State sale/purchase can be imposed only by Central Government. Provisions in respect of inter-State Trade and Commerce in Constitution of India are summarised below : Trade, commerce and intercourse throughout the territory of India shall be free, subject to provisions of Articles 302 to 304 of Constitution. (as stated below) [Article 301]
Restrictions on trade or commerce can be placed by Parliament in the public interest. (Article 302)
No discrimination can be made between one State and another or give preference to one State over another [Article 303(1)]. Such discrimination or preference can be made only by Parliament by law to deal with the situation arising from scarcity of goods [Article 303(2)]
State can impose tax on goods imported from other States or Union Territories, but a State cannot discriminate between goods manufactured in the State and goods brought from other States [Art. 304(1)].
State Legislature can impose reasonable restrictions on freedom of trade and commerce within the state in public interest. However, such bill cannot be introduced in State Legislature without previous sanction of the President (proviso to Article 304).
Tax on local goods and goods from other States must be sameLocal Sales Tax rate (i.e. Sales tax payable under State sales tax laws) must be same both for local goods and goods brought from other States. e.g. assume that if a product is manufactured in M.P. the sales tax rate is 6%. In that case, same rate will apply in case of goods brought from other State on stock transfer and sold within the State of M.P.Charging section of CSTAs per the Constitution, tax on Inter State sale/purchase can be levied only by Union Government. CST Act has been enacted for this purpose. Section 6(1) of CST Act provides that subject to other provisions of the CST Act, every dealer shall be liable to pay tax under this Act on all sale of goods (other than electrical energy) effected by him in the course of Inter-State trade or Commerce. Section 6(1) is called as ‘Charging Section’ as it imposes levy on sale of goods on Inter-State sale.IMPORTANT WORDS IN CHARGING SECTION - (a) Levy is on sale of goods (i.e. levy is not on purchases) (b) it is on sale as defined under section 2(g) (c) sale should be of goods as defined in section 2(d) (d) there is no levy on electrical energy, though electrical energy is ‘goods’. [section 6(1)] (e) sale should be in course of inter-state Trade or commerce as defined in section 3.LIABILITY SUBJECT TO OTHER PROVISIONS OF ACT - The levy is subject to other provisions of Act, i.e. the liability is not absolute. e.g. section 8(1) prescribes lower rate of taxes in certain cases, section 6(2) exempts subsequent sales by transfer of documents during movement of goods etc. Proviso to section 6(1) exempts sale of goods in the course of exports. Thus, the levy is subject to these and other exemptions.Meaning of ‘Inter State Sale’Section 3 of CST Act defines Inter-State sale or purchase as follows : 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. Thus, inter-state sale can be as per section 3(a) or section 3(b). It has been held that these two modes are mutually exclusive. – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379 - confirmed in UOI v. K G Khosla & Co. Ltd. - (1979) 43 STC 457 (SC) = (1979) 2 SCC 242 = AIR 1979 SC 1160 = (1979) 3 SCR 453, i.e. when a sale falls under section 3(a) it cannot fall under section 3(b) and CST can be levied only once. In Bharat Heavy Electricals v. UOI - AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = (1996) 4 SCC 230 = JT 1996(4) SC 427, it was held that whether a particular sale is inter-state or not has to be decided only with reference to section 3 of CST Act alone and no other section. Similarly, to decide question in which State the tax is leviable, only section 9(1) is relevant - no other provision is relevant.Sale which ‘Occasions movement of goods’ - As per section 3(a), ‘Inter State sale’ takes place if the sale occasions movement of goods from one State to another. In CST v. Suresh Chand Jain - (1988) 70 STC 45 (SC), it was held that a sale can be said to be in the course of inter-state only if two conditions concur viz. (i) sale of goods and (ii) a transport of those goods from one State to another.There are following essential ingredients of inter-State sale under this sub-section: Transaction must be a completed sale.
Location of buyer and seller is immaterial. Thus, even if buyer and seller are within the same State, sale will be inter-state, if sale occasions movement of goods from one State to another. e.g. the buyer may have construction site in another State and may ask seller to despatch goods directly to the site. Inter State sale by transfer of documents is also possible even when buyer and seller are in same State.
There should be an agreement to sale which contains a stipulation (express or implied) regarding movement of goods from one State to another. - Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939.
It is immaterial whether a completed sale precedes the movement of goods or follows the movement of goods or takes place while the goods are in transit. What is important is that movement of goods and the sale must be inseparably connected - CST, UP v. Bakhtawar Lal Kailash Chand Arhti - (1992) 87 STC 196 = 1992 AIR SCW 2246 = AIR 1992 SC 1952 = JT 1992 (4) SC 388 (SC 3 member bench) [In Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44 = 1976 2 SCR 939, it was held that concluded sale should take place in a State which is different from the State from which goods move. However, now the later judgment (i.e. 1992 judgment) prevails].
Even if goods move from one state to another in pursuance of agreement to sale and the sale is completed in the State in which goods are received, it will be an inter-State sale. - Balabhgas Hulaschand v. State of Orissa 1976 2 SCR 939 = (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (1976) 2 SCC 44. [However, this would be so only if there is stipulation in the agreement regarding transfer of property in goods].
There should be physical movement of goods from one State to another. Such movement must be inextricably connected with sale. - Balabhgas Hulaschand v. State of Orissa (1976) 37 STC 207 (SC) = AIR 1976 SC 1016 = (176) 2 SCC 44 = 1976 2 SCR 939 * State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench).
The contract may not provide for movement of goods. It is enough if such movement is result of covenant of sale or is incidental to the contract. It is sufficient if the movement of goods is implicit in the sale.- UOI v. K G Khosla and Co. (P.) Ltd. - (1979) 43 STC 457 (SC) = AIR 1979 SC 1160 = (1979) 2 SCC 242 = (1979) 3 SCR 453. It is not necessary that covenant regarding inter-State movement must be specified in the contract itself. It is enough if the movement is in pursuance of and incidental to the contract of sale - English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 - same view in Oil India Ltd. v. Superintendent of Taxes - (1975) 35 STC 445 (SC) = AIR 1975 SC 887 = (1975) 3 SCR 797 (SC).
It is immaterial in which State the property (i.e. ownership) of goods passes to the buyer. - Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC) * English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = (1977) 1 SCR 631 = AIR 1978 SC 19. Property may pass in either State – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379.
Sale need not precede the inter-State movement. Sale can be either before the movement or after the movement. - Oil India Co. Ltd. v. Superintendent of Taxes (1975) 3 SCR 797 (SC) = AIR 1975 SC 887 = (1975) 35 STC 445 (SC). It is immaterial in which State the property in the goods is passed. It is not necessary that inter-State movement must precede the sale - ITC Classic Finance and Services v. CCT - (1995) 97 STC 330 (AP HC) * English Electric Co. of India Ltd. v. Dy CTO - (1976) 38 STC 475 (SC) = AIR 1978 SC 19 = (1977) 1 SCR 631 * ONGC v. State of Bihar - (1976) 38 STC 435 (SC) = AIR 1976 SC 2478 = (1977) 1 SCR 34.
Movement of goods should be incident of sale and should be necessitated by the contract of sale and this be inter-linked with the sale of goods - Kelvinator of India Ltd. v. State of Haryana (1973) 32 STC 629 (SC). The movement or despatch of goods from one State to another should be under a covenant or incident of contract of sale with the buyer – Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = (1961) 1 SCR 379 = AIR 1961 SC 65.
Mode of transport is immaterial. It may be aircraft, rail, post, motor transport, angadia, ship or hand cart - State of Bombay v. United Motors – AIR 1953 SC 252 = (1953) 4 STC 133 (SC)
Even if buyer takes delivery from the seller, it can be inter-State sale if movement of goods to other State is a necessary part of transaction, e.g. if cement is issued within the State to a buyer but as per allotment order the buyer had to necessarily take the goods out of the State, it is an Inter-State Sale. - Mohanlal Hargovandas v. State of MP - (1955) 6 STC 687 (SC).
Situs of a sale or purchase is wholly irrelevant as regards its inter-state character - Bengal Immunity Co. Ltd. v State of Bihar AIR 1955 SC 661 = (1955) 2 SCR 603 = (1955) 6 STC 446 (SC). Situs of sale is immaterial.
Sale of machinery is inter-state even if it is erected and commissioned in another State. In Inter State sale, situs of sale is irrelevant. – State of Andhra Pradesh v. Usha Breco (2001) 121 STC 621 (AP HC DB).
Sale should conclude in different State. - State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). [Meaning that if sale concludes in the same State, subsequent movement will be on behalf of purchaser alone and will not be inter State sale].
Temporary movement through another State is not Inter State sale - Explanation 2 to section 3 states that if movement of goods starts from one State and ends in the same State, it will not be deemed to be movement of goods during ‘inter State sale’; even if during transit goods pass through other State.Sale by transfer of documentsSection 3(b) provides for Inter-State sale by transfer of documents of title to goods during the movement from one State to another. As per section 3(b), 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 is effected by a transfer of documents of title to the goods during their movement from one State to another.This definition is important as all subsequent inter-state sales to registered dealers by transfer of documents during movement of goods are exempt from sales tax [E-I, E-II transaction, as explained later].Section 3(a) requires that sale should ‘occasion movement of goods’. There is no such requirement in section 3(b). Hence, for purpose of section 3(b), the movement of goods from one State to another need not be occasioned by sale. For example, if the goods are being sent to a branch by transport, sale during movement by transfer of document will also be an ‘inter state sale’ u/s 3(b).What is ‘Document of Title of Goods’ - When the goods are handed over to the carrier, he hands over a receipt to the seller. The seller sends the receipt to buyer. The buyer gets delivery of goods on submission of the receipt to the carrier at other end. The receipt of carrier is ‘document of title of goods’. The words ‘document of title’ is defined under section 2(4) of Sale of Goods Act. Such document is usually called (a) Lorry Receipt - LR in case of transport by Road (b) Railway Receipt - RR - in case of transport by rail (c) Bill of Lading - BL - in case of transport by sea (d) Air Way Bill - AWB - in case of transport by air. It is called ‘document of title’ as one who submits the same is entitled to get delivery of goods, if document is in his name or endorsed in his name.Transfer of Document - The document of title may be in favour of buyer, Agent of seller, Banker or even ‘Self’. When the document is in favour of Agent/Banker/self; the agent/banker/‘self’ has to transfer the document in favour of the purchaser. Such transfer is normally by way of endorsement on the ‘document of title’. The endorsement is made on ‘document of title’ by writing words in the nature of ‘Deliver to or to the order of . . . . . . . . . . . . . . . . . . . . .’. The endorsement has to be signed by the endorser. The person in whose favour document is endorsed can further endorse the same in favour of other person. Thus, there can be more than one endorsements of the document. Technically and legally, document can be transferred by mere delivery even without endorsement. However, endorsement is a convenient mode of transfer as it gives proof that the transfer is in due course of trade. In Dy. Commissioner v. ARS Thirumeninatha Nadar Farm - (1968) 21 STC 184 (Mad HC DB), it was held that sale by transfer of document of title of goods may be effected by handing over the document and that endorsement to that effect on the document is only one of the proofs but not necessarily the only way to prove the fact - quoted with approval in State of Tamilnadu v. N Ramu Bros. - (1993) 89 STC 481 (Mad HC DB).Transfer of Document is a symbolic delivery of goods to the purchaser. It carries with it full ownership of goods. Delivery of ‘document of title’ is equivalent to the delivery of goods themselves. - J V. Gokal and Co. (P.) Ltd. v. Assistant CST - 1960(2) SCR 852 = 110 ELT 106 = 11 STC 186 = AIR 1960 SC 595 (SC 5 member constitution bench) - quoted and followed in MMTC v. STO 1998 AIR SCW 3475 = 1998(5) SCALE 446 = AIR 1999 SC 121. Stock Transfer/Branch TransferOne of the basic and obvious conditions of Inter-State sale is that there should be a sale. If a manufacturer sends goods to his branch in other State, it is not a ‘sale’ as you cannot sell to yourself. Similarly, if a dealer sends goods to his Agent in other State who stocks goods on behalf of the dealer, it is not a sale. Such agent is usually called ‘Consignment Agent’. Goods are despatched to another State on consignment basis and the person despatching goods retains ownership of goods. Since no sale is involved, there is no ‘Inter State Sale’.In Goodyear India Ltd. v. State of Haryana - (1990) 76 STC 71 (SC) (at page 98), it was held that mere consignment of goods by a manufacturer to his own branches outside the State does not amount to sale or disposal as such; the consignment of goods is neither sale nor a purchase. This is called ‘stock transfer’ or ‘branch transfer’. Here, movement of goods takes place from one State to another, but it is not an inter State sales. STOCK TRANSFER FOR WORKS CONTRACT – Stock transfer for works contract in different State is permissible and in such case, there will be no sales tax liability in State from which goods moved. – State of AP v. Bhooratnam (2000) 117 STC 371 (AP HC DB). [Now tax will be payable after 11-5-2002].NO STOCK TRANSFER OF TAILOR MADE GOODS - As explained later, stock transfer envisages transfer of standard products, which are sold off the shelf. If buyer is known or identified before removal of goods from factory, it is not really a 'stock transfer'. In short, stock transfer of tailor made goods or custom built products is a bogus stock transfer, shown just to avoid CST. CONSIGNMENT AGENT - Goods are despatched to Consignment Agent by Principal. Goods remain property of the Principal. Agent sells goods on behalf of Principal. Consignment Agent collects sales proceeds and remits the same to Principal. The Consignment Agent can recover his commission, godown charges, insurance charges etc. Despatch to Consignment is not a sale as property in goods is not transferred and hence no CST is payable. C&F AGENT – Some times, Clearing & Forwarding Agents [C&F Agents] are appointed at various places. Such agents stock and sale goods on behalf of the principal. In Piramal Health Care Ltd. In re (2000) 37 CLA 353 (MRTPC), it was observed, ‘A C&F Agent does not have the right to property in the goods stocked with him by the manufacturer. His duties are confined to stocking the goods and forwarding them to persons and places as instructed by the manufacturer. The right to sell the goods does not vest in him’.BRANCH TRANSFER - Here, the Principal has his own branch/depot in another State where goods are sent. These are stocked at depot in the branch and sold. There is no transfer of property when goods are despatched to branch and hence there is no liability of CST. This is often called ‘stock transfer’ or ‘branch transfer’ or ‘depot transfer’.When Stock Transfer is treated as Inter-State sale - Goods are despatched to branch/consignment agent in another State and then these are sold from the branch, depot or place of consignment of agent. However, if the movement of goods is occasioned on account of sale, the movement will be treated as inter-State Sale. One illustration will make the distinction clear.Let us assume that Tata Iron and Steel Co. Ltd. (TISCO), manufacturing Steel, has a factory at Jamshedpur, Bihar. TISCO manufactures Steel of various standard shapes and sizes. TISCO has a depot at Howrah in West Bengal. Steel plates, rods, billets etc. are sent to its depot at Howrah. When the goods are sent from Jamshedpur to Howrah, there is inter State movement, but the movement has not occasioned on account of any covenant or contract for sale. Hence, it is not an Inter-State sale but a stock transfer. Sale takes place when a customer approaches TISCO depot at Howrah and takes delivery from Howrah. Here, the sale by TISCO from its Howrah depot is an Intra-State sale within West Bengal.However, assume that a buyer from Howrah wants Steel of a particular size and specification, which is not a standard size and specification and hence is not available in Howrah depot of TISCO. He approaches TISCO and TISCO manufactures Steel in its Jamshedpur factory in Bihar as per the specific requirements of the buyer. After manufacture, goods are sent to depot of TISCO at Howrah and goods are sold to the buyer from Howrah depot of TISCO. In such case, the movement of goods from Jamshedpur, Bihar to Howrah, West Bengal has occasioned as a necessary incident of contract and hence it is a Inter State sale, even if goods are supplied from depot of TISCO at Howrah and invoice is raised from TISCO, Howrah.Double taxation when stock transfer held as sale - In Ashok Leyland Ltd. v. UOI 1997(2) SCALE 242 = (1997) 9 SCC 10 = (1997) 105 STC 152 (SC), the dealer despatched the goods to his depot in another States from his factory in Tamilnadu, treating the same as stock transfer. Dealer sold the goods from the depots and paid sales tax in the State in which goods were sold. Later, the dealer received notice from Tamilnadu sales tax authorities that in respect of its sale of vehicles to various State transport undertakings from the depot, the movement of goods from Tamilnadu has to be treated as 'inter state sale'. Dealer pleaded that if Tamilnadu sales tax authorities ask him to pay tax on such stock transfer, it will be double taxation, as he has already paid sales tax in respective States when goods were sold from the depots. Other State Governments will not refund the sales tax collected by those State Governments. Supreme Court appreciated the difficulty, which has arisen because there is no central mechanism which would decide questions of such nature. Supreme Court directed dealer to continue with assessment. If the assessing authority and appellate authority of Tamilnadu decided against the dealer, the dealer should approach Supreme Court for suitable directions. – similar directions were given in KCP Ltd. v. State of MP (1998) 108 STC 580 (SC).In Bharat Heavy Electricals v. UOI - AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = 1996(4) SCC 230 = JT 1996(4) SC 427, somewhat similar situation arose, when sales tax really payable to one State was collected by another State. The Supreme Court ordered the another State Government to pay tax to State Government to which it was really due [After formation of Central Sales Tax Appellate Authority, that authority will be in a position to give such a relief].AUTHORITY TO RESOLVE DISPUTES IN COURSE OF INTER STATE SALE – To overcome the difficulties as above, ‘Central Sales Tax Appellate Authority’ has been constituted u/s 19 of CST Act. [Sections 19 to 26 were incorporated in CST Act w.e.f. 11.9.2001]. The provisions are discussed in a later chapter. [The CST Appellate Authority has not been constituted till May, 2003].Burden of proof in case of consignment despatches - Since consignment despatches are usually resorted to avoid liability of CST, section 6A of CST Act provides that when a dealer claims that transfer of goods outside State is not a sale (i.e. it is branch transfer/consignment sale); he has to prove that the inter-State transfer of goods is not a sale. (In legal terminology; this means that burden of proof is on dealer to establish that the inter-State transfer of goods is not a sale). Sales tax authorities do not have to prove that the sale is ‘Inter State’. The authorities can presume the same unless contrary is proved by the dealer. Dealer will have to prove that it is not an Inter-State sale. For this purpose, he must produce a declaration from agent/branch from other State in prescribed form ‘F’. [Till 11-5-2002, production of ‘F’ form was not mandatory and other proof could be produced to prove stock transfer].

CST – Works Contract and Forms Procedure
‘Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.WHAT IS WORKS CONTRACT - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important. Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.CONTRACT OF SKILL & LABOUR - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].MERE SUPPLY OF LABOUR NOT COVERED – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB). Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]Value liable for Works Contract Tax – Some important case law is discussed here.BUILDERS ASSOCIATION OF INDIA v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = 1989(1) SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.GANNON DUNKERLEY AND CO. v. STATE OF RAJASTHAN - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods. The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.STATE OF KERALA V. BUILDERS ASSOCIATION - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.OTHER JUDGMENTS - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).ROYALTY PAYABLE CAN BE INCLUDED FOR PURPOSE OF WORKS CONTRACT TAX – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty. SALE PRICE FOR PURPOSE OF CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards. WORKS CONTRACT OF MOVABLE PROPERTY - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.WORKS CONTRACT IN CASE OF IMMOVABLE PROPERTY - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.
Source of Procedures under CST ActProcedures are important for any taxation law. Often valuable tax concessions are lost or penalties are imposed only because prescribed procedures are not followed. Procedures for CST Act are covered as follows : Rules framed by Central Government
Rules framed by State Governments under CST Act
Rules as prescribed in State Sales Tax Laws of each State.
Central Sales Tax Act is a peculiar Act - though the tax is levied as Central Sales Tax, it is administered by respective State Governments. In Bharat Heavy Electricals v. UOI - AIR 1996 SC 1854 = (1996) 102 STC 373 (SC) = 1996(4) SCC 230 = JT 1996(4) SC 427, it was held that State Machinery acts as machinery of Central Government for administration of CST Act. In Khemka & Co. v. State of Maharashtra AIR 1975 SC 1549 = (1975) 3 SCR 753 = 1975(2) SCC 22, it was held that substantive laws of Central Act must be applied. State Act is applicable for procedures alone. CST Act and Rules framed by Central Government make provisions for very few procedures. In respect of other procedures and provisions, provisions as applicable in the State in respect of the General Sales Tax Law of the State are also applicable in respect of Central Sales Tax in respect of dealers registered in that State. State Governments are also authorised to frame rules under CST Act.Some Provisions of State Laws applicable to CST - Section 9(2) of CST Act provides that all provisions of 'General Sales Tax Law' of each State, except those provided in CST Act and Rules itself, in respect of the following shall also apply to persons liable under Central Sales Tax Act in that State : Periodic Returns
Assessment, provisional assessment and reassessment
Advance payment of taxes
Registration of transferee and imposition of tax liability on transferee
Recovery of tax from third parties
Appeals, review, revision and references [except in case of appeals u/s 6A or 9]
Refunds, rebate, penalties and interest
Compounding of offences
Treatment of documents furnished by dealer as confidential.
Offences and penalties (except those covered in CST Act itself)
State authorised to administer and collect Tax - CST Act is administered by States. The State authorised to collect tax is authorised to administer the tax. Registration under CST ActCST Act makes provisions for registration of dealer. Registration brings many advantages e.g. the dealer can issue ‘C’ form and purchase goods at concessional rate.Compulsory Registration under CST - Section 2(f) states that 'registered dealer' means a dealer who is registered under section 7 of CST Act. As per section 7(1), every dealer liable to pay Central Sales Tax has to register himself with sales tax authority. As per section 6(1) of CST Act, every dealer effecting sale in the course of Inter State trade or commerce is liable to pay CST. Thus, only those dealers who ‘effect’ inter state sales are required to register under CST Act. ‘Effect’ means ‘bring about, accomplish, cause to exist or occur’ [Concise Oxford Dictionary 1994 edition]. Thus, intermediaries like agents, transporters etc. who only facilitate sales are not required to be registered, as they do not ‘effect’ sales. Central Government has authorised State Governments to prescribe State Sales Tax authorities authorised for the purpose of registration. Thus, registration under CST Act is done by State Sales Tax authorities who are authorised for the purpose.Voluntary Registration - A dealer registered with State sales tax authorities may voluntarily apply for registration under CST Act even if he is not liable to pay Central Sales Tax [section 7(2) of CST Act]. He is entitled to apply for registration even if goods sold or purchased by him are exempt under State sales tax law. This application for registration can be made any time. This provision is mainly useful when the dealer makes purchases in Inter State but all his sales are within the State. Thus, he is not liable for payment of any CST. However, he can make purchases in Inter State at concessional rate only if he is registered. Hence, he can register even if he is not liable to pay any CST.Application for registration - Application for registration should be made in prescribed form ‘A’ as per CST (Registration and Turnover) Rules; within 30 days from the date when dealer becomes liable to CST. Application fee of Rs. 25 is payable (by way of court fee stamps). Application has to be signed by (a) proprietor of business (b) one of the partners in case of business owned by partnership firm (c) Karta or Manager of HUF (d) director or principal officer of Company (e) principal officer in case of association of individuals or (f) officer authorised by Government in case of Government.ADDITIONAL PLACES OF BUSINESS - If a dealer has places of business in different States, he has to obtain separate registration in each State. However, if he has more than one places of business within the same State, he has to get only one registration with additional places of business endorsed on the Certificate. Definition of 'place of business' has already been explained in earlier chapter.Security from dealer under CST Act - As per section 7(2A) of CST Act, the Registering authority can ask for proper security from the applicant for (a) realisation of taxes due and (b) proper custody and use of forms (like C, E-I/E-II, F and H) which are supplied by Sales Tax authorities for use by the dealer [section 7(2A)]. Additional security can also be demanded from a dealer who is already registered [section 7(3A)]. Security cannot be demanded without granting opportunity of personal hearing. The security should not be more than estimated tax liability for the current year i.e. year in which security/additional security is demanded [section 7(3BB)]. Security may be in form of surety, execution of a bond, by deposit of Government securities or by way of cash deposit. Demanding security is not essential. Moreover, security demanded should be reasonable and for good and sufficient reasons. The security can be forfeited, after giving personal hearing, if the CST due is not paid by dealer or the blank sales tax forms issued to him are misused [section 7(3D)]. After such forfeiture, additional security has to be furnished. If such additional security is not furnished, sales tax authority may not issue further blank sales tax forms.The security can be refunded, partly or wholly, if, sales tax authorities are of opinion that such security is not required.Order demanding security or additional security or not refunding security is appealable. Appeal should be filed within 30 days. The appellate authority can condone the delay in filing of appeal, if sufficient cause is shown [section 7(3H)]. There is no further appeal against the order of Appellate Authority and the order passed by Appellate Authority is final [section 7(3J) of CST Act].Other documents required at time of registration - Other documents required at the time of registration vary from State to State. Normally, following are asked for - (a) Particulars of Directors/ partners (b) Copies of articles of association, memorandum in case of company and partnership deed if applicant is a firm (c) Copies of rent agreements (d) Nominations as Manager (e) List of places of business, godown (f) Details of machinery (g) Details of bankers (h) Photographs of directors / partners.Certificate of Registration under CST - The registering authority will ensure that application is in conformity with provisions of CST Act. He can make necessary enquiries e.g. (a) particulars given are correct (b) Materials requested for registration are eligible for inclusion and the goods are in fact needed for the business. After he is satisfied and after obtaining required security, the dealer will be issued a Certificate of Registration in prescribed form ‘B’. A copy of the same will be issued for every additional place of business in the State. This certificate should be kept at principal place of business and a copy of the certificate should be kept at each additional place of business in the State.AMENDMENT OF CERTIFICATE - The certificate can be amended e.g. change of name, change of business, change of class of goods in which he carries business, change/addition of place of business, warehouses etc. This amendment can be made on application from dealer or by sales tax authorities themselves after giving notice to dealer. In Orient Paper Mills v. CST - (1969) 23 STC 308 (MP HC), it was held that the amendment will be effective from date of application for amendment - quoted with approval in Larsen and Toubro Ltd. v. CCT - (1995) 97 STC 102 (Pat HC FB). [In view of SC judgments cited above in respect of effective date of registration, these decisions appear to be correct].All items of purchase and sale must be included in Registration - The ‘Registration certificate’ is indeed very important. As per section 10(c), false representation when purchasing any goods that the class of goods are covered by the registration certificate, is an offence. As per section 10(a), furnishing a false certificate is an offence. Thus, while issuing ‘C’ form or other forms under the Act, it must be ensured that goods are covered in the Registration Certificate. This is particularly so because there is no provision to amend the Registration Certificate with retrospective effect.Cancellation of CST Registration - Registration can be cancelled either on request of dealer or suo motu by sales tax authorities.Forms for DeclarationsA 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 and H are printed and supplied by Sales Tax authorities and are supplied by them. Dealer has to issue declarations in the forms printed and supplied by the Sales Tax authorities only. These forms are in triplicate. [Form D was to be issued by Government and can be printed/typed by the Government department making purchases. Now form D has been abolished w.e.f. 1-4-2007].Declaration in Form C - As per section 8(1)(b) of CST Act, sales tax on Inter State sale is 4% 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 certificate of the purchasing dealer. Otherwise the tax is higher - (10% or tax leviable on sale of goods inside the State, whichever is higher). If the selling dealer pays CST @ 4% 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’. AUTHORITY TO ISSUE BLANK C FORM - The blank C form has to be obtained by purchasing dealer from Sales Tax authority in the State in which goods are delivered, which is usually the place where purchasing dealer is registered. However, in case on Inter State sale by transfer of documents, the purchasing dealer may not be registered with the sales tax authorities in the State where the goods are delivered. In such case, he can obtain blank C form from sales tax authority where he is registered.C Form is mandatory to avail concessional rate - 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 - Kedarnath Jute Mfg Co. v. CTO - (1965) 3 SCR 626 = (1965) 16 STC 607 (SC) = AIR 1966 SC 12. STATE GOVERNMENT CANNOT WAIVE THE CONDITION OF C/D FORM - Section 8(5) has been amended w.e.f. 11th May 2002 to provide that State Government can issue an exemption subject to fulfilment of requirements of section 8(4). This sub-section requires declaration form registered dealer/Government. Thus, State Government cannot waive condition of C/D form. Number of Transactions per ‘C’ certificate - One declaration in C form can cover all transactions in one whole financial year, irrespective of total amount/value of transactions during the year. [rule 12 amended w.e.f. 7-8-1998].ONE CERTIFICATE FOR EACH FINANCIAL YEAR - If a transaction covers more than one financial year, separate C form is required for each financial year. Provision of one 'C' form per financial year has been upheld in Laxmi Agarbatti Factory v. UOI (1996) 102 STC 248 (MP HC DB).Procedure in case of Loss of C form - If duly completed or blank C form is lost when it was in custody of purchasing dealer or when the form was in transit to selling dealer, the purchasing dealer will have to furnish ‘Indemnity Bond’ to sales tax authority (from whom the blank forms were obtained) in prescribed ‘G’ form. If the duly completed C form is lost after it is received by selling dealer, he has to submit indemnity bond to sales tax authority of his State.Certificate in D Form - As per section 8(1)(a) of CST Act as existing upto 31-3-2007, sales tax on Inter State sale is 4% or general sales tax rate for sale within the State whichever is lower, if sale is to Government. Otherwise the tax was higher - (10% or tax leviable on sale of goods inside the State, whichever is higher). Section 8(4)(b), therefore, provided that concessional rate is applicable only if Government (which is purchasing goods) issues a certificate in prescribed form ‘D’. Now D form has been abolished and sale to Government will be treated as sale to unregistered dealer w.e.f. 1-4-2007.Declarations in E-I and E-II form - As per section 6(2) of CST Act, first Inter State sale is taxable. Subsequent sale during movement of goods by transfer of documents is exempt from tax, if the subsequent sale is to Government or a registered dealer. This is subject to condition that such subsequent seller obtains declaration (a) from the selling dealer i.e. from registered dealer from whom goods were purchased. (b) from purchaser a declaration in C form or declaration in D form. 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. One example will clarify the requirements. Assume that W despatches 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 Bengal 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.Some provisions of C form applicable to E-I/E-II forms - Following provisions of C form are also applicable in respect of E-I/E-II form (a) One declaration for all transactions in one year (b) Separate declaration for each financial year (c) Indemnity bond if form is lost (d) Issue of duplicate form (e) Submission at any time before assessment (f) Like C form, the E-I/E-II forms are mandatory and sales tax concession is not available if the required form is not submitted.Declaration in F Form - We have seen that when the goods are despatched to another State on consignment basis or to branch of dealer in another State, there is Inter State movement of goods but there is no sale and hence no CST is payable. This provision is often misused and goods are despatched in the garb of consignment or branch transfer though actually it may be a sale. Hence, section 6A(1) of CST Act provides that when a dealer claims that the Inter State movement of goods is not a sale, he has to prove the same. (In legal terminology, it is called that ‘burden of proof’ is on the dealer). For this purpose, he must produce a declaration in ‘F’ form received from Consignment Agent or Branch Office in another State. As per section 6A(1) as amended w.e.f. 11-5-2002, submission of F form is mandatory to prove stock transfer. Otherwise, the transaction will be treated as ‘sale’ for all purposes of CST Act.Goods can be sent to other State for further manufacture - Goods can be purchased at concessional rate if the goods are for use in the manufacture. Thus, after manufacture, the sale need not be in the same State. In Indian Aluminium Co. Ltd. v. STO - (1993) 90 STC 410 (Ori HC DB), the company was manufacturing Aluminium Ingots at Hirakud, Orissa. These were despatched to plants of the company in other States for further manufacture of Aluminium coils, sheets etc. Plants in other States were sending ‘F’ forms. The department accepted the forms without any objection. One form F covering receipts during the month can be issued. If space in form F is not adequate, a separate list may be attached as annexure to form F giving details, provided that the annexure is firmly attached to the form. The blank form has to be obtained from sales tax authority in which the transferee is situated, i.e. State where goods were received. If the form is lost, indemnity bond has to be given and duplicate form clearly marked as ‘Duplicate’ can be issued.Certificate in form H - Sale during course of export is exempt from CST. As per section 5(3) of CST Act, penultimate sale is also deemed to be in course of export and is exempt from CST. Dealer actually exporting the goods has proof of export like customs documents, bank certificate, airway bill/bill of lading, shipping bill etc. However, the penultimate seller does not have any direct evidence to prove that his sale is exempt from tax. In such cases, the actual exporter has to issue a certificate to the penultimate seller in form H. The blank ‘H’ forms are to be obtained from sales tax authority by the final exporter.SEZ UNIT HAS TO SUBMIT I FORM - As per CST Rule 12(10), SEZ [Special Economic Zone] unit will supply I form. In such case, supplies to unit in SEZ made by dealer outside special economic zone will not be liable to CST.