Indirect Tax

The Ministry of Finance (Department of Revenue) through the Central Board of Excise and Customs (CBEC), an apex indirect tax authority, implements and administers excise (central excise), customs and service tax laws. Circulars, notifications and clarifications issued by the CBEC supplement these indirect tax laws. Issues involving interpretation of tax laws are decided by the judiciary, which is independent of the legislature.

Value Added Tax (VAT) is a form of indirect Tax and is in the nature of multipoint sales tax. Tax on sale by states in the form of VAT continues to draw power from entry 54 in list of seventh schedule of the constitution of India. Sale and purchase of goods is subjected to charge of VAT. VAT is levied under Central and State VAT legislations depending upon the movement of goods in pursuance of a sale transaction. If the transaction involves movement of goods from one state to another (inter-state), the tax is levied under Central Sales Tax Act (CSTA), 1956.

This Act also covers transactions of import of goods into or export of goods out of India. Sales tax is not imposed on import of goods into the country or export of goods out of the country. The Central Sales Tax (CST) Act is administered by the state governments and the tax is levied at the origination of transaction (origin based levy). The rates of tax under Central Sales Tax Act vary from state to state and product to product. The standard rate of CST is 2 per cent or the lower rate applicable in the state of seller if the purchaser is purchasing the same for resale or for use in manufacture of goods for sale or for specified purposes and both the seller and buyer are registered dealers. Otherwise, the rate is higher of 12.5 per cent or the rate applicable in the state of sale.

The transactions of sales or purchases involving movement of goods within a state (intra-state) are governed by respective State Sales Tax Acts. States also levy tax on transactions which are "deemed sales" like works contracts and leases. A works contract essentially is a contract for carrying out work involving supply of labor and material where the property in the materials passes during the course of execution of the contract. Lease is a transaction involving transfer of right to use goods.

The standard rate of VAT is 12.5 per cent and there is reduced rate of 5 per cent. Besides that, there are exemptions and rate of 1 per cent and 20 percent for specified products. In addition to sales tax, some states also levy additional tax / surcharge, turnover tax or entry tax.

Sales tax / state VAT is payable by the seller to the government. Ordinarily, sales tax / state VAT is recovered from the buyer as a part of consideration for sale of goods.