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Sales Tax – Applicability, Chargeability and Basic Concepts
TABLE OF CONTENTS
1 Preamble................................................................................................................. 2
2 Definitions............................................................................................................... 3
2.1 Dealer: ............................................................................................................ 3
2.2 Goods: ............................................................................................................ 3
2.3 Price: .............................................................................................................. 3
2.4 Business: ........................................................................................................ 3
2.5 Sale:................................................................................................................ 4
2.6 Taxable Turnover:.......................................................................................... 4
2.7 Total turnover:................................................................................................ 4
2.8 Declared goods:.............................................................................................. 4
3 Taxation of Industrial inputs .................................................................................. 5
3.1 Industrial inputs.............................................................................................. 5
3.2 Component Part.............................................................................................. 5
3.3 Raw material .................................................................................................. 5
3.4 Consumables .................................................................................................. 5
3.5 Declared goods and other goods .................................................................... 5
4 The Scheme............................................................................................................. 6
4.1 Operational aspects ........................................................................................ 6
5 Purchase tax ........................................................................................................... 7
6 Turnover tax........................................................................................................... 7
7 Cess ........................................................................................................................ 8
8 Notifications: .......................................................................................................... 8
9 Registration: ........................................................................................................... 8
10 Books of accounts ................................................................................................... 9
11 Sale bill ................................................................................................................... 9
12 Name board: ........................................................................................................... 9
13 Collection of tax and Penalties:............................................................................. 10
14 CENTRAL SALES TAX ACT 1956...................................................................... 11
14.1 Export Sale:.................................................................................................. 11
14.2 The penultimate sale in respect of Exports: ................................................. 11
14.3 Sale occasioning import: .............................................................................. 11
14.4 Rate of tax in respect of interstate sales ....................................................... 12
14.5 "C" Form: ..................................................................................................... 12
14.6 E1 Sales:....................................................................................................... 13
15 Conclusion ............................................................................................................ 14
Page 1 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
Sales tax – Applicability, Chargeability and Basic Concepts
S Venkataramani
Partner, Singhvi, Dev & Unni
Chartered Accountants
1 Preamble
Karnataka Sales Tax Act, 1957 is basically a single point taxation system where tax is
payable, at the point of first sale as per the Second schedule, a single point purchase
tax at the point of levy specified in the third schedule, a single point tax in respect of
declared goods at the point of levy specified in the fourth schedule, tax on works
contract as per the sixth schedule, tax on lease as per seventh schedule, tax at the
point of last sale as per eighth schedule and goods which are subjected to tax on
second or subsequent sale as per ninth schedule..
Goods, which are exempt from payment of tax under the KST Act, are listed in the
fifth schedule.
In terms of section 5 of the KST Act, every dealer is required to pay tax at the rate of
10% with effect from 01.04.98 on goods at first point of sale, which are not covered
under any of the schedules. However, tax at every point of sale is payable glass
bottles.
Under Rule 26 (9)(a) and 26(9)(b) of the KST Rules every dealer who wishes to
claim that he is not liable to tax in the State is required to file a declaration in Form
No.32 obtained from the registered dealer who sold or purchased the goods to or from
him.
In respect of goods manufactured by a dealer other than raw materials, component
parts and packing materials for a brand owner the brand owner is the person who is
deemed to be a first dealer in the State. It implies that the sales tax is payable by such
owner. However, if such manufacturer has charged sales tax the brand owner is
eligible for a setoff of such tax paid subject to production of proof.
In cases where a dealer assigns the brand name or trademark after purchase of goods,
the dealer selling the goods after affixing such trade mark or brand name shall be
deemed to be the first seller in the State. However, if such manufacturer has charged
sales tax the brand/ trademark owner is eligible for a setoff of such tax paid subject to
production of proof.
Page 2 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
2 Definitions
2.1 Dealer:
The definition of "dealer" which forms the cornerstone for the levy of sales tax is
quite exhaustive;
He must be a person
He must be carrying on a business
The business may be of selling, buying, supplying or distributing goods as
defined in Section 2(1) (m)
The consideration for the activity may be for cash or for deferred payment, or
for remuneration, commission or other valuable considerations.
Barter/exchange is not valuable consideration under the KST Act, and hence, such
transactions are not taxable.
2.2 Goods:
In terms of section 2(m) of the KST Act goods means all kinds of movable properties
and excludes newspapers, auctionable claims, stock & shares and securities. Sale of
Lottery tickets/Import licences/ exim scrip‟s/ Vabals have been held to be sale of
goods taxable under the KST Act.
2.3 Price:
Price is the amount of consideration which a seller charges the buyer for parting with
the title to the goods, the expenditure which he had to incur for transporting these
from the place of purchased by him, the octroi, his margin of profit, handling charges
including interest on the capital invested, the sales tax component, and other
incidental expenses, constitutes the price of goods.
2.4 Business:
The definition of "Business" is an important one in any Sales Tax Law, because it has
an interlink with the definition of "dealer" in Section 2(1)(k) which, in turn, is crucial
to the determination of the exigibility of Sales tax levy under the charging provisions.
The first part of the definition specifies the following items as included in the
definition of "business":
Any trade, commerce or manufacture
Any adventure or concern in the form of trade, commerce or manufacture
It is also made clear that profit motive is not relevant to determine whether an activity
amounts to business or not, and it is also not necessary that any profit should actually
arise from that activity. The second part of the definition ropes in any incidental or
ancillary transaction connected with any trade, commerce, manufacture, adventure or
concern.
Page 3 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
2.5 Sale:
In order to constitute a Sale all the following conditions should be cumulatively
present.
A bargain or agreement of sale;
The payment or promise of payment of price;
The delivery of goods, and
The transfer of property from the seller to the buyer
The definition of a sale includes a works contract, a transfer of right to use goods and
a hire purchase transaction.
A sale or purchase of goods is said to take place within the State in case of specific or
ascertained goods at the time the contract is entered into and in case of unascertained
or future goods at the time of their appropriation to the contract.
In terms of explanation 4 to the definition of sale two sets of sales are said to have
taken place in respect of agency transactions in the following circumstances:
When the agent purchases/ sells the goods at one rate and transfers the goods/
sale proceeds to the principal at another rate; or
When the agent does not account to his principal the entire collections/
deduction/ purchases effected by him; or
When the agent acts on behalf of a fictitious or non-existent principal.
2.6 Taxable Turnover:
Means "taxable turnover" as the turnover on which the dealer becomes liable to pay
tax. Such turnover has to be determined by allowing the deductions prescribed in
Rule 6 from the "total turnover" as defined in section 2(1)(u-2). Such turnover
should, however, not include the turnover of purchase or sale in the course of inter-
state trade or commerce or in the course of export of goods outside India, or in the
course of import of goods into India.
2.7 Total turnover:
Means the aggregate turnover in all goods of a dealer at all places of business in the
State, whether or not the whole or any portion of such turnover is liable to tax,
including the turnover of purchase or sale in the course of interstate trade or
commerce or in the course of export of the goods out of the territory of India or in the
course of import of the goods into the territory of India;
2.8 Declared goods:
Goods, which are of special importance in inter-State trade or commerce as per
section 14 of the CST Act, are called declared goods. The rate of tax on any sale or
purchase of such goods inside the State shall not exceed four percent and such tax
shall not be levied at more than one stage. The rate of tax and point of levy are
specified in the Fourth Schedule. The law envisages refund of tax in cases where
such tax paid goods are subsequently sold in the course of inter-state trade or
commerce.
Page 4 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
3 Taxation of Industrial inputs
The law relating to reimbursement of tax on industrial inputs is summarised
hereunder:
3.1 Industrial inputs
The expressions “industrial inputs” mean either a “component part” or “raw
material”, or packing materials but do not include cement, wood, bamboo, timber
other than veneer, casuarina, eucalyptus, pulpwood and packing shooks and inputs
falling under Serial Number 12 of Part “S” and Serial Number 10 of Part “M” of the
Second Schedule.
3.2 Component Part
The expression “component part” means an article, which forms an identifiable
constituent of the finished product and which, along with others, goes to make up the
finished product.
3.3 Raw material
“Raw material” means any material from which another product can be made,
through the process of manufacture, either by itself or in combination with other raw
materials; or
A processing or any other chemical solvent (including chemicals used for testin g,
analysis or research) used in the solvent extraction process or a catalyst required in
the manufacturing process, but it does not include fuels and consumable stores of
similar type.
3.4 Consumables
The expression “consumables” does not include petroleum products falling under
Serial Number 11-A of Part „F‟, Serial Number 12 of Part „M‟ and Serial Number 5
of Part „P‟ of the Second Schedule.
3.5 Declared goods and other goods
Declared goods are those goods specified in the fourth schedule to the KST Act.
Other goods are goods other than those specified in the fourth schedule to the KST
Act.
Page 5 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
4 The Scheme
The scheme of reimbursement of tax liable to tax under section 5 is applicable to:
Industrial inputs purchased from another registered dealer for use by him as
component part or raw material or packing material of any other goods which, he
intends to manufacture inside the State for sale.
Purchase of consumables for use in such manufacture.
4.1 Operational aspects
The operational details in respect of reimbursement of tax on the turnover of purchase
are as follows:
In case of declared goods specified in fourth schedule the tax paid in excess of
3% and 2% in case of other goods.
The purchase bill should indicate separately the amount of tax collected by the
seller.
The reimbursement allowable can be adjusted against the tax payable under the
KST/ CST/ KTEG Acts in any subsequent month or a refund can be claimed. The
refund/ adjustment is subject to the conditions prescribed in the rules. The
relevant rules are awaited.
The inputs purchased must be utilised in manufacture (inside the State) before the
expiry of the accounting year immediately succeeding the year of purchase.
Reselling of such inputs on which reimbursement/ refund claim is lodged is not
permitted.
The dealer claiming reimbursement of tax is required to maintain a proper stock
account of each input.
On a close reading of the amended provision the tax payable by the seller under
Section 6-B of the Act (turnover tax) shall not be eligible for setoff. Although
section 5A does not permit such set-off/ reimbursement the Commissioner in a
recent seminar has orally clarified that the intention of the proviso was to restrict
or disallow such set-off/ reimbursement of turnover tax paid in the hands of the
seller, and would be allowed to be set off against the tax payable by the
purchaser.
The cess paid on purchase will also be eligible for such set-off/ reimbursement.
Page 6 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
5 Purchase tax
Every dealer who purchases taxable goods on which no sales tax is payab le on sale
price of such goods is liable to pay purchase tax when such goods are:
Consumed in the manufacture of other goods for sale.
Consumed otherwise.
Disposed off other than by way of a sale within the State or by way of
interstate sales.
In the above scenarios sales tax will be payable on the purchase price of such goods at
the rate at which tax is payable on such sale.
Section 6 relating to purchase tax will not be applicable in respect of declared goods
taxable at the point of purchase/ sale or in respect of goods which have suffered tax in
the State at any earlier stage.
6 Turnover tax
Section 6B of the KST act provides for levy of turnover tax on “total turnover” at the
rate of
1.5% if the total turnover is less than Rs. 10 crores in a year or
3% if the total turnover exceeds Rs.10 crores ina year.
Turnover tax will not be payable in the following cases:
On the sale of purchase of goods covered under fourth and fifth schedule of
the KST Act.
On the sale of purchase of goods in the course of interstate trade/ exports.
On sales tax collected under the KST/ CST Acts, freight collected at actuals,
discount allowed, sales returns, labour charges, on sale of business as a whole
etc.,.
Turnovers, which are specifically, exempt from payment of t urnover tax by
way of notifications.
Turnover tax is payable at the rate of 1% on second and subsequent sales in terms of
notification no. FD 190 CSL 93(IV) dated 31.03.94.
Turnover tax will be payable on slab basis at the rates indicated above if the total
turnover of the dealer for the immediately preceding previous year is less than Rs. 10
crores.
Page 7 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
7 Cess
In addition to the tax payable on the turnovers relating to sale, works contract,
transfer of right to use or on purchase of goods liable to purchase tax cess is payable
at the rate of 5% on such tax. Cess is not applicable on the turnovers relating to
Declared goods specified in the fourth schedule.
8 Notifications:
Section 8A empowers the State Government to grant exemptions or reductions in
rate of tax on the sale or purchase of any of the goods, or to any class of
dealers/persons by a notification. It is immaterial whether the turnover of the goods
specified is liable to be taxed at single point or multi-point. It is also open to the
Government to say as to whether the exemption granted is in respect of a series of
transactions by all the successive dealers in respect of goods liable for tax at multi-
point or in respect of a single point.
Similar powers are conferred on the State Government even in terms of section 8(5)
under the CST Act.
9 Registration:
Any person whose total turnover in a year exceeds Rs. 2 Lakhs or he has entered into
an interstate transaction is required to get himself registered under the KST Act. The
procedure for registration is provided in section 10A of the KST Act.
If a person who is liable for registration fails to register, the prescribed authority on
survey/ inspection/ inquiry can proceed to register such person on suo-moto basis.
In the recent budget proposals the Government has indicated that only one
registration is possible in respect of a single premises.
With effect from 01.04.2001 every person or a clearing or forwarding house or
agency, transporting agency, shipping agency or shipping out agency or steamer
agency or air cargo agency or courier agency engaged in the business of transporting
taxable goods is required to register and file the prescribed returns.
Independent registration of branches of corporate bodies located within the State,
which was hitherto permitted, has been withdrawn. It implies that such Corporate
have now got to file a consolidated return of all their branches within the State and go
through a single assessment procedure.
Page 8 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
10 Books of accounts
In terms of Rule 26 of the KST Rules every registered dealer shall maintain books of
accounts in the place of business mentioned in the Registration Certificate.
The books of accounts are required to be maintained in a true and correct manner of
the daily transactions in any language notified by the State Government. The books of
accounts shall indicate among others the following particulars:
Commodity wise purchase and sales;
Goods produced/manufactured/bought or sold together with bills and
vouchers;
Detailed accounts in respect of imports/exports/interstate sales/ declared
goods;
The accounts are also required to indicate taxable/non taxable sales etc.,.
11 Sale bill
Every dealer whose turnover exceeds Rs.50000/- in a year or if the value of such
transaction exceeds Rs.100/- is required to issue a sale bill and preserve it for a period
of not less than 5 years from that date.
If the value of each such bill is less than Rs.100/- it is not mandatory to issue a sale
bill. However, such dealer is required to prepare a consolidated bill in respect of all
such transactions at the close of each day and raise a consolidated invoice.
In terms of rule 23B of the KST rules a bill of sale is required to contain the following
particulars:
Full name and address of the selling dealer with his registration certificate no.
Sl. No. Of the bill (Machine numbered) and date.
Name and address of the buyer.
Registration certificate no. Of the buyer if he is a dealer.
Description, quantity and value of goods.
Signature of the selling dealer.
12 Name board:
In terms of rule 46A of the KST rules every dealer liable for registration is required to
exhibit a name board in Kannada at the entrance to his place of business/
branches/godowns etc.,.
Page 9 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
13 Collection of tax and Penalties:
In terms of section 18 of the KST Act:
A registered dealer shall not collect any amount by way of tax or purporting
to be by way tax exceeding the rate or rates at which he is liable to pay tax.
No amounts by way of tax or purporting to be by way of tax shall be
collected in respect of sales, which are exempt
Turnover tax under section 6B cannot be collected
A dealer opting for payment of tax under the composition scheme under section 17(1)
or section 17(8) under the provisions of the Act shall not collect any amount by way
of tax or purporting to be by way of tax.
Any person contravening the above provisions is liable for penalty not exceeding one
and half times of such amount under section 18A. The assessing authority can
impose the penalty under this section only after giving a reasonable opportunity to the
assessee to prove the bonafides of his case.
If any amount is collected by way of tax in contravention of section 18, knowingly or
unknowingly it shall be remitted to the government along with the monthly return.
Any customer having paid excess tax can claim such amount from the government.
Page 10 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
14 CENTRAL SALES TAX ACT 1956
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 -
Occasions the movement of goods from one State to another, or
Is effected by transfer of documents of title to the goods during their
movement from one State to another.
The principles relating to inter-state transactions were enunciated by the Supreme
Court in Oil India Ltd., V. Supt. of taxes - 35 STC 445, TISCO Vs. S.R.Sarkar - 11
STC 655, Amrithsagar Mills Vs. CST - 17 STC 405, etc. From these, the following
emerge:
The inter-state movement must be as a result of a covenant express or implied
in the contract of sale or an incident of the contract.
It would be enough if the movement were in pursuance of and incidental to
the contract of sale.
The words "sale occasions the movement" mean moved by reason of sale.
A sale can occasion the movement of goods only when the terms of sale
provide that the goods would be moved i.e., when the contract of sale so
provides.
14.1 Export Sale:
A sale or purchase of goods shall be deemed to take place in the course of the export
of the goods out of the territory of India only if the sale or purchase either occasions
such export or is effected by a transfer of documents of title to the goods after the
goods have crossed the customs frontiers of India.
14.2 The penultimate sale in respect of Exports:
The last sale or purchase of any goods preceding the sale or purchase occasioning the
export of those goods out of the territory of India shall also be deemed to be in the
course of such export, if the transaction between exporter and his foreign buyer is
entered into first, and thereafter the exporter enters into the transaction with the
penultimate seller or purchaser, as the case may be, with a view to fulfilling his
commitment with the foreign buyer, and the export is of the same goods that have
been purchased from the penultimate purchaser. Compliance of these conditions is a
must.
14.3 Sale occasioning import:
A sale or purchase of goods shall be deemed to take place in the course of the import
of the goods into the territory of India only if the sale or purchase either occasions
such import or is effected by a transfer of documents of title to the goods before the
goods have crossed the customs frontiers of India.
Page 11 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
The test for deciding whether the purchase or sale had occasioned import is pointed
out in K.G.Khosla‟s case (1966) 17 STC 473(SC). It was held in that case that when
the movement of goods from foreign country to India was in pursuance of the
condition of the contract between the assessee and the Director General of Supplies
and Disposals and there was no possibility of these goods being diverted by the
assessee for any other purpose, the sales must be held to have taken place in the
course of import of goods.
14.4 Rate of tax in respect of interstate sales
In terms of section 8 of the CST Act, every dealer who sells to the Government or a
registered dealer is liable to pay sales tax in respect of such sales at the rate of:
4% if he is able to obtain and file the prescribed Form C/D or;
8% if such goods are declared goods; or
10% or at the rate applicable to the sale or purchase of goods inside the
appropriate State whichever is higher.
Section 8(2A) of the CST Act provides that if the tax is generally exempt or generally
subject to tax at a rate lower than 4% in the appropriate State the rate of tax payable
on such turnovers under the CST Act shall be either “NIL” or such lower rate.
14.5 "C" Form:
Every dealer, who in the course of interstate trade or commerce, sells to the
Government or to a registered dealer shall be liable to pay four percent of his turnover
if he furnishes a declaration duly filled and signed by the registered dealer to whom
the goods are sold, forms "D" and "C" respectively.
In terms of section 8(3)(b) of the CST Act, a registered dealer can issue "C Form"
only in respect of goods which are purchased for resale, for manufacture of goods, or
processing of goods for sale or in mining or in the generation or distribution of
electricity or any other form of power or packing materials. It must also be borne in
mind that Form C can be issued only in respect of goods specified in the registration
certificate in Form B under the CST Act.
The Central Government has amended the Central Sales Tax (Registration and
Turnover) Rules, 1957 with effect from 7th August 1998 (07.08.98) by inserting a
second proviso to Sub-rule (1) of Rule 12, which reads as follows:
"Provided further that a single declaration may cover all transactions of sale
which take place in one financial year between the same two dealers".
The implication of this amendment is as follows:
In respect of interstate transactions effected between the same two dealers on
or after 07.08.98 one single "Form C" declaration can be issued for one
financial year.
Page 12 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
In respect of transactions pertaining to the period prior to 07.08.98 the applicability of
issue of "Form C" is as follows:
In respect of supplies effected against a single purchase order in one financial
year one "Form C” can be issued irrespective of any monetary ceiling limit;
In respect of a single invoice exceeding Rs.one lakh one "Form C" can be
issued (in the absence of purchase order);
In respect of multiple invoices (in the absence of purchase orders) the
monetary limit in respect of one single "Form C" cannot exceed Rs. one lakh.
In view of the amended provisions of Rule 12 of the CST rules with effect from
07.08.98 I feel that even in respect of transactions prior to 07.08.98 one single "Form
C" can be issued. This view is based on the decision of the Madras High Court in the
case of Bimetal Bearings Ltd., Vs State of Tamil Nadu (90 STC 128) wherein the
Court held that:
"The ultimate requirement was the actual production of "C" forms as such to establish
the genuineness of the transaction and the fact that it satisfied the category of sales
entitled to concessional rate of tax, as prescribed in law. The requirement relating to
the monetary limit in respect of more than one transaction for an individual "c" form
would at the most be a directory requirement. The defect alleged in the present case
was not so fundamental in respect of any essential feature going to the root of the
matter so as to affect the very legality and validity of the "C" form. When there was
no allegation of absence of particulars, to reject the "C" forms in their entirety and to
deprive the petitioner of the benefit of the concessional rate of tax on the sole ground
that the forms comprised more than one transaction in excess of the monetary limit,
would be unreasonable".
Based on the above judgement the Government of Tamil Nadu has issued circular
instructions "that one "C form" may be accepted for all the transactions in a month,
without any monetary limit".
The tax authorities in Maharashtra, had earlier indicated that this rule will apply only
prospectively but however, it has later on issued a clarification that this rule may be
applied in respect of financial year 1998-99 if the said "C Form" is being issued after
07.08.1998.
The Commercial tax department in Karnataka has not issued any circular/
clarification in this regard. In view of the above I feel that even in respect of
transactions prior to 07.08.98 one single "Form C" can be issued after 07.08.1998.
14.6 E1 Sales:
In terms of Sec 3(b) read with Sec 6(2) of the CST Act, a subsequent (commonly
known as E1) sales effected by a dealer by transfer of documents of title to the goods
during their movement from one state to another to the Government or to a registered
dealer is exempt under the CST Act.
Page 13 of 14
Sales Tax – Applicability, Chargeability and Basic Concepts
In order to claim the exemption granted by section 6(2) of the Act:
The sale must be a second or subsequent sale in the course of inters state
trade;
The sale must be effected by transfer of documents of title during the
movement of the goods from one State to another;
The sale must be of goods of the description referred to in section 8(3) of the
Act;
The sale must be to a registered dealer; and
Form E1 or E2 as the case may be, submitted to the assessing authority;
15 Conclusion
I have in this paper attempted to highlight certain basic issues relating to applicability
and chargeability of Sales Tax under the Karnataka Sales Tax Laws. I have also not
touched upon issues / concepts which are going to be dealt with during the course of
this weeklong workshop by other eminent speakers. I presume that this paper will
elicit a healthy interaction amongst the delegates.
Page 14 of 14
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