VAT & CST: Simplifying A Complicated Matter

Last Updated at: March 10, 2020
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If you’re planning on running a business online, you will have read about Value-added Tax (VAT), which is a confusing subject as it has two components: VAT and Central Sales Tax (CST). The difference between the two is that VAT is to be levied at the local or state level, while CST is for inter-state trade. Therefore, if you’re based out of Mumbai and are selling in Pune, VAT will come into play, while for transactions between Mumbai and Bangalore, CST will come into play. Simple enough, you might think, but it isn’t always so.

What Registrations Do You Need?
In the cast of VAT, the need for registration is based on turnover, which changes from state to state. In most states, sellers with a turnover of over Rs. 5 lakh need to have VAT registration. VAT applies to only tangible goods and products. In the case of CST, every seller that enters into a transaction with a seller from another state needs to be registered, regardless of turnover. CST does not apply to newspapers and shares.

Get your GST registration now

How is it charged?
VAT is to be levied at every stage of sale, where some value is added to raw materials, but taxpayers receive credit for tax already paid on procurement stages. Every state has different rates at which VAT is to be charged. CST, on the other hand, is a central act, but chargeability is state-specific.

Frequently Asked Questions
What if a trader moves goods from one state to another, for sale in this state?
If a trader procures goods in one state and moves them into another state by paying lesser VAT, he will not avail of the benefits as CST will automatically come into play.

Which goods are excluded from CST?
The definition of goods excludes electricity, newspapers, stocks and shares. However, do note that if the newspaper is sold as say, wastepaper, it becomes taxable.

Does exemption in local sales tax get carried over to CST?
Not at all. Exemption in local sales tax law is irrelevant to CST. Therefore, in Tamil Nadu, for example, local sales tax is levied only on sales over Rs. 3 lakh. However, CST has no such exemption. Therefore, CST would need to be paid on the first Rs. 3 lakh, too.

What is sale in transit?
The CST provides an exemption on sale in transit, which applies to those sales that are made while the goods are in movement from one state to another. Therefore, rather than paying CST twice, it can be paid just once, provided that the seller can produce Form E-I, as obtained from prior vendor, and ‘C’ form from buyer. The case of M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu explains this point clearly. In this case, a local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other state. Madras High Court held that the first transaction is first interstate sale and the second sale is also subsequent interstate sale exempt u/s.6 (2) of CST Act.

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VAT & CST: Simplifying A Complicated Matter

1229

If you’re planning on running a business online, you will have read about Value-added Tax (VAT), which is a confusing subject as it has two components: VAT and Central Sales Tax (CST). The difference between the two is that VAT is to be levied at the local or state level, while CST is for inter-state trade. Therefore, if you’re based out of Mumbai and are selling in Pune, VAT will come into play, while for transactions between Mumbai and Bangalore, CST will come into play. Simple enough, you might think, but it isn’t always so.

What Registrations Do You Need?
In the cast of VAT, the need for registration is based on turnover, which changes from state to state. In most states, sellers with a turnover of over Rs. 5 lakh need to have VAT registration. VAT applies to only tangible goods and products. In the case of CST, every seller that enters into a transaction with a seller from another state needs to be registered, regardless of turnover. CST does not apply to newspapers and shares.

Get your GST registration now

How is it charged?
VAT is to be levied at every stage of sale, where some value is added to raw materials, but taxpayers receive credit for tax already paid on procurement stages. Every state has different rates at which VAT is to be charged. CST, on the other hand, is a central act, but chargeability is state-specific.

Frequently Asked Questions
What if a trader moves goods from one state to another, for sale in this state?
If a trader procures goods in one state and moves them into another state by paying lesser VAT, he will not avail of the benefits as CST will automatically come into play.

Which goods are excluded from CST?
The definition of goods excludes electricity, newspapers, stocks and shares. However, do note that if the newspaper is sold as say, wastepaper, it becomes taxable.

Does exemption in local sales tax get carried over to CST?
Not at all. Exemption in local sales tax law is irrelevant to CST. Therefore, in Tamil Nadu, for example, local sales tax is levied only on sales over Rs. 3 lakh. However, CST has no such exemption. Therefore, CST would need to be paid on the first Rs. 3 lakh, too.

What is sale in transit?
The CST provides an exemption on sale in transit, which applies to those sales that are made while the goods are in movement from one state to another. Therefore, rather than paying CST twice, it can be paid just once, provided that the seller can produce Form E-I, as obtained from prior vendor, and ‘C’ form from buyer. The case of M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu explains this point clearly. In this case, a local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other state. Madras High Court held that the first transaction is first interstate sale and the second sale is also subsequent interstate sale exempt u/s.6 (2) of CST Act.

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