Handbook on Central Sales Tax by Madhukar N Hiregange - Read Online
Handbook on Central Sales Tax
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Summary

Central Sales Tax (CST) is levied on the interstate sale of goods. CST is one of the oldest tax levies and has been around since 1957. This law is by the Central Government but the administration is by the States.

CST levy is set at local rates. The revenue neutral rates which apply to most commodities in States goes up to 15%. The lower rate of 2% is available against Form C which can be issued by specified persons (resellers, manufacturers, processors etc) and cannot be issued by consumers.

The State VAT laws have been in place since 2003. The payment of tax, filing of returns, assessment, reassessment etc under CST are all as per the local VAT laws which are ever changing and quite draconian. The quality of the administrators in general also leaves a lot to be desired. There are many disputes and demands for differential taxes from VAT departments in most states for wrong issuance of C Form in situations where goods were not permitted to be procured against Form C.

GST would be in place by April 2017 if all goes well. However, CST law is expected to continue as a parallel levy at 1% after 1st April 2017 for a couple of years. This could lead to CST continuing to be non-vattable even under GST regime and an add-on to costs incurred by the dealers.

In this book we have covered important concepts, case laws and possible dispute areas along with resolution. The movement of goods on stock transfer basis, subsequent sale, sale in course of import and export are a few of the important areas where tax planning and savings are possible. The student who wishes to understand sales tax law could use this as a ready reference. This book contains practical tips for common issues faced by practitioners in this area as well. The probable impact of GST laws on concepts discussed is touched on in most chapters.

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Handbook on

CENTRAL SALES TAX

(IN INDIA)

MAY 2015

Madhukar N Hiregange

&

Roopa Nayak

Notion Press

#5 Muthu Kalathy Street, Triplicane,

Chennai - 600 005

First Published by Notion Press 2015

Copyright © Madhukar N Hiregange 2015

All Rights Reserved.

ISBN: 978-93-52060-73-3

This book has been published in good faith that the work of the author is original. All efforts have been taken to make the material error-free. However, the author and the publisher disclaim the responsibility.

No part of this book may be used, reproduced in any manner whatsoever without

written permission from the author, except in the case of brief quotations embodied in critical articles and reviews.

Preface

The total sales tax on sale of goods in India to be collected by the Union and State governments this year 2014-15, is estimated to be about Rs.4,50,000 Crores. This almost 2/3rd of the estimated Direct Tax Collections of India and 2 times the Customs or Central Excise or Service tax which contribute around Rs.2 Lakh crores each.

The objectives of writing this handbook were:

• To understand the subject better,

• To cover concisely the basic concepts of Central Sales Tax,

• To enable a tax compliant assessee to make better decision,

• To enable ethical professional to practice in the subject by adding value to their clients and

• To enable honest tax officers to administer judiciously.

The book is expected to be used for quick reference by any interested reader.

We acknowledge Rajesh Kumar T R our partner for his comprehensive editing and sequencing suggestions. In this effort the inputs from CA Hanish Jain, Bangalore and CA Vishal Jain, Coimbatore were valuable. We thanks Nandini H. G., Ramya C and Vinayaka in particular as well as all the staff at Bangalore for assisting in providing the supporting us to complete this book.

Readers are requested to pen their feedback and suggestions on improvement on this maiden academic effort of learning in this subject. roopa@hiregange.com and madhukar@hiregange.com.

2nd May 2015

CA Madhukar N Hiregange

CA Roopa Nayak

About the Authors

CA. Madhukar N Hiregange

Qualified as Chartered Accountant in 1987 and completed DISA & CISA in 2002. Senior Partner Hiregange& Associates having offices in Bangalore, Hyderabad, Visag and Gurgaon. Knowledge partner at Hiregange Academy a knowledge& employability initiative.Jointly Authored 14 books on Central Excise, Service Tax, Karnataka VAT and Excise / Service Tax Audit. IDT - IPCC Study Material has been the addition in 2014. Working on a Book on GST- Primer expected to be released by May 2015.

Was a Central Council Member of the ICAI for the term 2010-13 with a vision to enhance the credibility of the profession, strengthen the professional in practice and employment, make the course less painful while increasing the quality of the student coming out.

Involved in efforts to make the Indirect Tax laws in India simple, certain and fair. Managing Trustee – Empower Education Foundation. Sponsoring education of 100+ lesser privileged students in Bangalore & Mysore. Believes in Value Based Practice and Life.

CA RoopaNayak is a Commerce Graduate from St. Agnes College, Mangalore and a member of the ICAI. Partner Hiregange& Associates. She has co-authored the book Student’s handbook on Indirect taxes for IPCC students, Central Excise Made Simple (e-book - KSCAA publication), contributed to Material for Certificate Course on IDT and Enabling ST Practices of ICAI. Further provided knowledge inputs for Central Excise E-learning module for ICAI.Active monthly contributor for the KSCAA Magazine, newsletters for Kochi and Pune branches of ICAI, newsletters of HiregangeAcademy.An active speaker in seminars and workshops organized by the firm and Branches of ICAI.

How to use the book

(1) The book has 3 sections:

Section I – The Law of CST with analysis in individual Chapters;

Section II- Brief Procedures ending with Common Errors; and

Section III – The value additive chapter on Impactod sectors/ complex deemed sales, Interconnection of other indirect tax laws, and Impact on few Industry Verticals

(2) The first 2 chapter are a must be read first to get a flavour/ gist of the law and procedures.

(3) The Chapter on procedures at a glance provides all the procedures. CST law is substantially procedural, with a need to understand concepts in depth, this is provided in Legal section I itself.

(4) Where the explanation is not clear, reference to the bare Act in the end of the book maybe useful.

(5) To get a better understanding readers may like to see:

(a) Recent decisions and their implications

(b) Important tips if a practitioner

(6) Certain Issues specific to specific Industry.

(7) With Goods & Service Tax being a distinct possibility the impact under GST as we understand now.

Contents

Title

Copyright

Preface

About the Authors

How to use the book

Section I

1. CST Law at a Glance

2. CST Procedures at a Glance

3. Historical Background

4. Levy of CST

5. Meaning of Sale

6. Interstate sale

7. Subsequent Sale

8. Rate of Tax

9. Classification

10. Exemptions

11. Valuation under Central Sales Tax Act

12. Branch/ Stock Transfer

13. Job Work

14. Returns and Rejections

15. Warranty Repairs and CST

16. Adjustment of Payment by Input Tax Credit

17. Sale/ Purchase in the Course of Export and Penultimate sale

18. Sale or Purchase in the Course of Import

19. Check Post Compliances

20. Investigation

21. Assessment, Reassessment, Collection and Enforcement

22. Refunds and Adjustments

23. Prosecution & Penalty under CST

24. Advance Ruling & Appeals under CST

25. Sales to or by EOU under CST

26. CST and SEZ units

27. Entry Tax, Octroi and Local Body Tax

28. VAT – General Concepts in States.

Section -II

29. Registration

30. Maintenance of Records, Invoicing & Return Filing Concepts under CST [VAT]

31. Common Issues in Audit

32. Possible Errors in CST and VAT

33. Issue of Forms

34. Organizational Structure of CST and administration of the CST law

Section - III

35. CST - Interconnection with Other Indirect Taxes

36. CST/ Local VAT - Impact on Trade, Manufacture, Service, Government Sectors

37. Works Contract

38. Hire Purchase- Lease

39. Other Deemed Sales

40. Information Technology Sector

41. E-Commerce Transactions

Appendix

Bibliography

SECTION - I

CHAPTER 1

CST Law at a Glance

The Central Sales Tax Act, 1956 along with the Central Sales Tax (Registration & Turnover) Rules, 1957 set out that the power of levy is with the Central Government but the collection is left to the States.

They provide for the following:

i. Determination of when an interstate sale takes place and when not.

ii. Which are the alternative methods of sale? The sale could be intrastate sale, interstate sale, sale or purchase outside State or in sale in the course of imports and exports.

iii. When the levy is attracted?

iv. Who collects the tax?

v. How the collection is to take place?

vi. How to distribute?

vii. Conditions for levy of tax on goods of special importance (declared goods).

The question is also one of when to start paying sales tax and how to comply with the CST law. We need to understand the nature of the law to determine how the liability can accrue and to what quantum.

The various aspects of the law and the manner in which liability is to be determined are provided below:

Step 1: Whether Goods? Section 2(d) defines goods in a wide manner to include "all materials, articles, commodities and all other kinds of movable property but does not include newspaper, actionable claims, stocks, shares and securities".

Movable property has been defined to be what is not an immovable property. Immovable property is defined in General Clauses Act, 1897 as "land and benefits from land and things attached to earth or permanently fastened".

Effectively, immovable goods or property attached to the earth are not "goods" and hence tax cannot be levied on the same. Goods which are fastened to the earth and cannot be removed without substantial damage are treated as immovable goods.

Machinery installed at site, tanks embedded to earth, cement poles erected on site are examples of immovable goods.

However, goods which could be moved around but fastened to the earth for convenience or to ensure vibration free operations may not be considered as immovable. Thus, in case where the machine was fastened to the earth using nuts and bolts and the poles inserted 1.5 feet deep to ensure that the machine is stable and at the time of operations and ensure that it does not vibrate. The machine was held to be movable¹.

The right to use immovable property would not amount to a right of use for a movable property, consequently not liable to CST. This would however be a subject matter of either the stamp act or service tax.

If there are no goods there is no levy. Therefore understanding what is included or not is essential. Judicial Clarity and more in Appendix-4 at end of book.

Step 2: What is Sale? Next dealer needs to examine whether the transaction is a sale of goods as understood under the CST law.

CST is a tax which is levied on sale of goods which are sold in the course of interstate trade or commerce. CST is an origin based levy, which is levied and collected by the State of origin of the goods. [More in Chapter on Levy of CST]

Sale means "a transfer of property in goods from one person to another for a consideration". The essential ingredients to be treated as sale are:

•Transfer of property in goods – There has to be change in the title or ownership of the goods. The transfer of property in Immovable property is excluded.

•There have to be two persons – There have to be two parties a seller of the goods and a buyer of goods to constitute a sale. A transfer to self or one’s own branch/depot is not a sale.

•It should be for cash or deferred payment or other valuable consideration - The consideration has to be in monetary terms such as cheques/drafts as the preceding words to valuable consideration are cash or deferred payment and accordingly the term consideration would need to be understood in that sense.

Interstate sale is sale or purchase of goods which occasions the movement of goods from one State to another or is effected by transfer of documents of title to goods during their movement from one State to another. [More in Chapter on Interstate Sale]

Subsequent Sale: Subsequent sale is "a sale taking place after the original sale started before delivery was complete". The intention of Government is not to levy multiple taxes on sale taking place in course of movement interstate. The subsequent sale is exempted. This is subject to production of given forms. [More in Chapter on Subsequent Sale]

Step 3: Whether Deemed sale? The deemed sales as per the definition of ‘sale’ are as follows:-

a. A transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration. This may cover scenario where the goods are not agreed to be sold under any contract but still the property in goods gets transferred for a consideration in money. Eg. Purchase of levy sugar by Government or compulsory acquisition.

b. A transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. This covers a transaction where there is contract for work and while executing the goods is transferred in the same form or other form by usage in the works contract. Eg. Cement, steel, etc., gets transferred in the work of construction of building. Paint gets transferred when a work of painting of parts of machinery is undertaken.

c. A delivery of goods on hire-purchase or any system of payment by installments. In this case the property in goods is not transferred and remains with the financier or hirer.The goods are delivered to other person who would be using the goods, still the transaction is considered as sale to the extent of installment or hire charges charged. Eg. A transaction where the person taking it on hire would be using the goods on payment of installments and if he fails to pay installments, such goods would be taken back by the owner.

d. A transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. This covers transactions whereby the control and possession of the goods for using the same is given to the user for consideration in money, though ownership still remains with the person giving it. Eg. Renting of printer machines on monthly rental basis to a company where the possession is also given to them.

e. A supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration. This is to cover a transaction between unincorporated association or body of persons to member of such association or body. This is included in deemed sale for the reason that based on the principles of mutuality, such association or body is considered to be one and the same and are not treated as separate persons. Whereas sale requires that the transfer of property between two persons. However still this concept is being agitated before judicial forums and does not have clarity. Eg. Small association of resident welfare association which is not registered as company or society, buys goods collectively and gives it to members against payments.

f. A transaction of sale by way of or as a part of any service or in any other manner whatsoever, of goods, being food or any other article of human consumption or any drink (whether or not intoxicating) where such sale or service is for cash, deferred payment or other valuable consideration. This covers a transaction whereby food or any other article for human consumption or any drink is given as a part of service or as a service itself.This would be considered as sale of goods and would be liable for sales tax/VAT. Eg. Serving food in hotels; catering for functions.

The concept of "Deemed sale is incorporated in Sales Tax/ VAT Acts and also in CST Act consequent to the amendments brought about in the Constitution in 1982 and based on the definition of tax on sale or purchase of goods" given in Constitution under Article 366 (29A). [More in Last Section of this book]

Step 4: Whether in State List or Central? The List II (State List) or List III (Concurrent List) of the VII th Schedule to the Constitution of India do not cover Central Sales Tax. Entry 92A of List I (Union List) empowers Central Government to impose tax on interstate sales. CST though a central levy, the States administer as well as retain the tax. [More in Chapter on History]

Step 5: What is the rate of tax and classification of goods?

Rate of tax: When the dealer sells goods which are specified in the certificate of registration of the purchasing dealer, he would be liable to pay CST at concessional rate of 2% against Form C. Where form is not given, the rate of tax would be as per the local VAT law. If a product is exempt under local VAT laws, it would be exempt even under CST Law. [More in Chapter on rate of tax]

Classification: Under CST the goods can be classified into three broad categories- exempted goods, declared goods and goods other than declared goods.

A. Tax free or exempted goods: These are the goods which are exempted from tax. The State VAT Schedule contains list of such goods.

B. Declared goods: The sales tax rate for such specified goods is not to be more than 5%.

C. Goods other than declared goods: This category covers goods which are liable to tax at differential rates as per rates set out in the State VAT Schedule.

The classification of goods consists of determining the Schedules of the VAT Act under which the said goods would be covered.

The schedules could set out the goods which are exempted, eligible to concessional rate, special rate, or the balance revenue neutral rates. Most States also have schedules for rates for different type of works contract transactions. The classification of goods in the States under the local VAT laws is important as that rate would apply where "C" forms are not issued or issuable. [More in chapter on classification]

Step 6: Whether Exemptions are Available? The next examination is whether or not the selling dealer is eligible and could avail the exemptions for the goods sold by him to purchasing dealer.

If there is an exemption, then exemption should be claimed. This is also due to reason that the input tax credit of CST paid is not available and cannot be taken by purchasing dealer and ends up becoming a cost.

Some States have provided exemption to new industries from tax or in some cases on payment of taxes collected for period of time. These benefits could be quite substantial as the savings or funding of deferred tax could be used in place of capital. The latest State to join the offering in form of sales tax sops is Telengana. [More in Chapter on Exemption]

Step 7: Whether any Other Exemptions? There is an exemption from CST when interstate sale of goods are to a SEZ unit or SEZ developer. This is subject to Form I being furnished to the supplier. [More in chapter on SEZ units]

100% EOU unit however needs to procure the goods from other States on payment of sales tax. Reimbursement of CST on purchases made from Domestic Tariff Area (DTA) is possible. [More in Chapter on 100% EOU]

Step 8: Valuation: Every dealer, who sells goods in the course of interstate trade or commerce, is liable to pay CST on his turnover. In determining the turnover of a dealer for the purposes of this Act, there are some specified inclusions and exclusions from the sale price. Sale price normally is the price which captures the costs upto the point of transfer of property. Most of the issues are settled in valuation of goods. [More in Chapter on valuation]

Step 9: Input Tax Credit: CST paid is not available as set-off against output VAT liability. However the CST can be paid out of the input tax credits availed under the local VAT laws. In case the credit is not sufficient then to pay in cash.

The input tax credit [only for local intrastate purchases] under various VAT laws normally has eligibility criterion for credit as under:

1. When item procured for resale, then credit is available for all items.

2. The credits on goods which are in the restricted list also are eligible for credit when resold.

3. When any capital goods are procured for the manufacture of goods other than the ones which are specifically excluded.

4. When inputs and consumables are procured for the manufacture of goods other than those which are specifically excluded as ineligible.

5. When goods are procured by the resident agent within the State. The agent is required to pay the VAT on his sales but not eligible for the purchases made on behalf of the principal. [More in Chapter on input tax credit]

Step 10: Whether branch transfer? The transfer of goods without payment of CST is permissible when one transfer to self or agent. This could be by way of transfer to branch/depot, consignment agent or clearing and forwarding agent.

Such transfer from one State to another is against Form F. However where there is a pre existing order as on date of transfer, the goods would be liable for CST. There are several disputes in this area. [More in Chapter on stock transfer.]

Step 11: Whether interstate Job work? The transactions under job work could be either with independent entities who have excess capacities or specialised processing abilities. These entities maybe outside the State. The job worker may add some material or may just work on the materials/ components supplied by the customer. In the event that they add material then to the extent of transfer of property involved there is a need to charge CST. [More in Chapter on Job Work]

Step 12: Whether it is Sale in Course of Import? CST is not applicable when goods are imported from outside India. Further the sale or purchase should occasion the import or be effected by transfer of documents of title before the goods have crossed the customs frontier of India. However once the goods are sold after they have crossed the customs frontier then transaction would be liable for CST. [More in Chapter on sale in course of import]

Step 13: Whether it is Sale in course of export? CST cannot be charged for goods exported from India. Further export also means a sale of goods taking place in the course of export of the goods out of the territory of India effected by the transfer of the documents of title to the goods after the goods have crossed the customs frontier of India.

It also includes the last sale preceding sale occasioning export, if such last sale took place after and was for the purpose of complying with agreement or order for or in relation to such export.

The penultimate sale [last but one sale before export] of traded goods and packing material is also eligible for exemption from CST, subject to issue of Form "H".All these measures lead to export competitiveness. [More in Chapter on Exports]

Step 14: Whether there are Sales Returns or Warranty Repairs? The sale price of all goods returned by the buyers within a period of 6 months from the date of delivery is deductible while calculating taxable turnover. [More in Chapter on sales returns]

Warranty is offered to prospective buyers of the manufacturer’s products. This warranty is made to the consumer, who is not identified at the time of manufacturing but as soon as he buys the product, this clause is activated in his favour.

The warranty repairs could be done by the manufacturer, dealers, distributors, authorized service centre. In course of such repairs at times parts could be replaced. Normally the warranty replacements are recovered as a part of the sale price of the product on which central excise duty as well as CST/ VAT is paid. [More in Chapter on warranty repairs]

Conclusion

In this segment, we have covered the main concepts under CST law. The CST is charged by the selling dealer and the cost of tax is borne by the buyer and finally by the consumer. The burden of cost is pushed to the next person in the supply chain.

It is a classic case of cascading or pyramiding effect of taxation as no credit similar to cenvat credit or VAT credit is extended to the buyers. The GST regime would address this anomaly, except for the 1% non-vattable additional tax proposed for 2 years accruing to the originating State.

CHAPTER 2

CST Procedures at a Glance

All indirect tax laws are procedural in nature and at times, the non compliance could lead to huge unnecessary and avoidable disputes and demands. The CST law till date has not seen too many amendments.

The CST law per se provides mainly for the following procedural requirements:

1. Registration ( Sec 7)

2. Determination of Turnover ( Sec 8A)

3. Subsequent sale exemption (Sec 9(1))

4. Appeal to highest appellate authority in case of stock transfer disputes

(Sec 18A)

5. CST appellate authority for settlement of interstate disputes (Sec 19) and

6. Advance ruling authority ( Sec 24)

The CST law prescribes under section 9 (2) that the State authorities would administer the other procedures as under:

• Assess, provisionally assess and reassess,

• Collect and enforce payment of tax,

• Charge interest or penalty,

• Filing of returns,

• Provide for advance payment of tax,

• Recover tax from third parties,

• Appeals, reviews, revision,

• Refund, rebates,

• Compounding of offenses and

• Other administrative procedures for enabling compliance.

The assessee who is doing any manufacture, trade, business or service may have to go through some common procedures to comply with the law and smoothly conduct his activities. Some of the common stages are examined briefly as under:

Stage 1: Examination of Liability: The purchase or sale of goods from/ to persons/ dealers outside the State would need registration. Even service providers who while providing a service transfer goods such as in construction, job work etc. would be liable for payment of CST. This stage is most important part of CST where the impact would depend on the status of the entity [manufacturer, importer, distributor, retailer, service provider etc). [More in Chapter on impact of CST on various sectors] The other taxes which impact the activity such as local VAT, Central Excise duty, Customs duty and Service Tax need to be examined to optimizetaxes. [More in Chapter Interconnection with CST] For liability on deemed sales as well as specific to some sectors like Information Technology and E- commerce see Section III.

Stage2: Registration: There is a need for everyone in business, trade, manufacture or service who deals in goods or even purchases goods interstate to be registered. A registered dealer would also able to take advantage of concessional rate of purchase for interstate sale where eligible for goods included in his certificate of registration. [More in the chapter on registration]

Stage3: Intimations and Disclosures: The CST/ VAT law may not cover every aspect of business. It maybe advisable that the way of doing business, goods dealt in, details of accounting, use of specific software, availment of credit be intimated to the revenue. There could be transactions where dealer has doubt due to ambiguity in law, circular not being clear, judicial decisions in regard to classification, valuation, tax credit etc. These type of doubts may not be worth going for an advance ruling and the practice followed generally could be declared seeking guidance in the matter. This would establish the bona fide way of doing business and if there is a difference of opinion of revenue ensuring that proper decision is taken to comply with the law after due study. In case of any unfairness, representation or advance ruling could be option.

Stage4: Delivery of Goods: The document of delivery for goods is a very important one. It is preferable that they are pre numbered.If generated from the system, then there should beno facility to cancel and re print.

The goods which are returnable maybe sent under a returnable delivery challan. These could be intermediate or finished goods which have been sent for further process, testing, packing etc. They could also be goods sent on approval basis. In these cases the stock reconciliation of the goods sent and received back would have to be done on regular basis.

The goods which are not returnable maybe sent through a delivery note which can be different and distinct from the returnable delivery challans. These could be where there is a stock transfer to branches, depots, consignment agents for further sale or job work. These are removed without payment of CST and require "F" form to be issued by receiver and submitted as proof for non payment of tax for the goods sent.

The goods could also be sent for captive consumption in case of further manufacture or usage in providing a service. Here also as it is not subjected to CST, the reconciliation and closure of the delivery notes is important. There could be other removal where sale is not involved such as free samples, donation, loan basis which are not subjected to CST. In these cases, the requirement of reversing the input tax to extent as prescribed due to absence of sale may be examined.

In all other cases the delivery note would be linked to the sales whether inter state or within. In these cases the confirmation that there is no delivery note missed would be important.

Stage 5: Invoicing: This document is the backbone of all commercial transactions as it contains the description of goods, the value ( including deductions claimed if any), the tax rate, tax payable, customers details, conditions of sale among other relevant details. The pre printed numbering is a good control for manual printing. However for electronic printing, the need to link to the delivery document, purchase order and no facility for cancelling an invoice are good control practices.

The reconciliation of the goods sent on approval, delivery notes outstanding, preserving of cancelled invoices, list of unfructified sales among other best practices could ensure that the liability under CST is correctly arrived at. [More in chapter on Invoicing]

Stage 6: Stock Transfer: The trade practices or demands by customers for just in time deliveries at times cause change in method of sale to accommodate the customer. The existence of an order consequent to which the goods move, would be liable for CST. The reconciliation of form "F" on regular basis is also important to avoid disputes at the time of assessement, re assessment or audit. A separate chapter has been dedicated considering the number of issues in this transaction which maybe referred.

Stage7: Job Work: The trade works for profit and at times, there is need of expertise in particular operations, at times the in house manufacturing maybe more expensive considering the scale of that operation or the cost of labour. When job work is done there are issues on return of the materials sent, scrap disposal, material addition if any during the process, subsequent movement to other job workers, raw material going directly to job worker, finished material going directly to the customer from job worker and the treatment of input credit. Reconciliation of quantities, conversion factor, tracking the intermittentmovements would avoid disputes.[More in chapter on Job Work]

Stage 8: Warranty, Repair & Returns:The tax is not payable on activities of repair within the warranty period as there is no consideration. The value of the activity would have been included in the value of sale and subjected to tax initially. However the movement of goods under warranty and their reconciliation is important. The return of the damaged parts and its disposal would also have relevance. There could be situations where a 3rd party does the warranty repair. Here could at times be transfer of property involved where 3rd party procures the goods and uses in repair. These would be billed to the original supplier/ manufacturer. The repair of goods beyond warranty is subjected to tax as there would be consideration.

The return of goods could be whole or in part. It maybe for repair and return or it could be just rejected due to non requirement or defects. The documentation in this area normally is weak, leading to tax exposure. The reconciliation of such goods, whether credit note issued, revised return filed, repaired and returned etc are important control aspects of business which could also have tax implications. [More in chapter on Warranty Repair and returns]

Stage 9: Input Tax Credit: The CST rate could be 2% under Form "C" or the regular rate for the product which could be upto 15% in some States. The adjustment of input tax against the CST is permissible. In normal course in trade the margins could be around 5% or so. The input tax credit could be in excess of 10%. Therefore it is very important that the system of taking the credit under CST should be automatic and if missed should be prompted by the system. Reconciliation on monthly basis is also recommended to ensure nothing missed. There are some restrictions on the credits as per law which is inviolate. There is a need to ensure that the return correctly depict the credit including the overlapped inputs from month to month. [More in chapter on Adjustment of Input Tax credit]

Stage 10: Payment of CST: The payment of tax within the due dates after due verification and adjustment against the credit available is an efficient method of doing business. There should be checks and balances to capture all sales/ purchases, application of proper rates and arriving at the tax payable. [More in chapter on Payment of CST]

Stage 11: Maintenance of Accounts: The law requires that the record of the business transactions are maintained in the premises of the dealer, duly updated. The dependence on computerized programs is widespread. There is a need to ensure that the masters are validated and the system is able to generate the requirements under the law. The basic entry needs to be made carefully and counter checked. The changes if any should be by way of a journal entry to have a track on adjustments whether proper or not. The possibility of back dated entries should not be enabled. Business decisions are taken based on the financials and figures in the financialsshould be robust and dependable. [More in Chapter onMaintenance of Accounts]

Stage 12: Filing of Returns: The tax man gets to examine the returns filed. All investigations / audit are incomplete without the reconciliation of the return with the books or financials which are certified. Therefore there is a need to get the returns checked before filing to avoid errors which may need filing revised return. The return document in itself is quite complex. Returns should also be filed in time to avoid being picked up as a non filer or late filer for audits or re assessment. [More in Chapter on Filing of Returns]

Stage 13: Investigation: In India there are many smaller dealers who are either uneducated or unorganized for whom tax is anathema. There are others who do not pay the taxes or pay less taxes taking the excuse of everyone in this business does it. These errant dealers need to be weeded out as the tax compliants are subsidizing them today. However investigations are mainly carried out in dealers who are already in the system for identifying leakages if any. The methodology of investigation can influence the future of taxation and therefore needs to be done taking care not to sour the fruit or kill the golden goose. The focus of the revenue should be on those outside the system as well as those who have been deliberately undervaluing or raising fake bills for credit to make the climate one of substantial compliance. [More in chapter on investigation, assessment]

Stage 14: Assessment/ Reassessment: The present regime from 2005 has been a self assessment scheme. However it would not be incorrect to say that neither the dealers nor the revenue has lived upto the expectation of the scheme. The poor practice of scrutiny of most dealers by calling it re assessment or audit has continued in all States. There is also substantial leakage many a times with the help of the revenue officers themselves at times. However accurate recording, proper reconciliation can avoid matters going into disputes. [More in Chapter on Investigation, Assessment]

Stage 15: Adjudication and Appeal: The dispute lead to notice being issued. It is found that adequate importance is not given to this area. The replies to the notice should be comprehensive and to lead all evidences to prove dealers point of view. In case of inadequate time, extension of time should be sought on record. The usage of speed post and registered post is recommended to avoid unnecessary interaction with the adjudicating officer. In case of adverse orders to be resolved move to appeal where a point by point rebuttal or compliance should be ensured. It should again be filed in time and conditions of pre deposit as per law (which maybe very unreasonable) are needed to be complied with. This is also an area of neglect and rampant corruption in India. The High Courts regularly pull up the administration for high pitched, predecided orders which do not follow the principles of natural justice. Inspite of this, assessees have not seen much improvement in most States.[More in Chapter on Adjudication and Appeal]

Stage 16: Interest & Penalty: The dealer who has not paid or short paid the dues to the government needs to compensate for the delay by payment of interest. In case of reassessment leading to additional tax the mandatory penalty would also be applicable.Unfortunately even for bona fide mistakes, voluntarily identified and corrected, penalties are fastened.[More in Chapter on interest and penalties]

Stage 17: Prosecution: The CST law has not been amended in recent times and still has some very harsh measures for non payment of tax. It includes provisions to arrest. Fortunately also provides for compounding the sameby payment of taxes and penalties. These provisions are not applied literally but the sword hangs on the dealer for non compliance at all times. [More in Chapter on Prosecution and penalties]

Stage 18: Compounding of Offense: Some offences can be compounded by the sales tax authorities. Compounding means the dealer agreeing to pay a fine and the sales tax authorities agree to drop further action in respect of the offfence. This is called as penalty in lieu of prosecution.

Stage19: Advance Ruling: The Authority for Clarification and Advance Rulings to clarify the rate of tax in respect of any goods or the exigibility to tax of any transaction or eligibility of deduction of input tax or liability of deduction of tax at source under the Local VAT provisions. Any registered dealer seeking clarification or advance ruling shall make an application to the Authority in such form, accompanied by proof of payment of such fee, paid in such manner as maybe prescribed. The Commissioner is empowered to revise any advance ruling or clarification of the Advance Ruling Authority, if the advance ruling/clarification is erroneous in so far as it is prejudicial to the revenue. Whereas the advance ruling/clarification issued is final subject to appeal to HC.

The order passed shall be binding on the applicant who sought clarification and in respect of the goods or transaction in relation to which clarification sought. Such a clarification would also be binding on the subordinate officers and first appellate authority. The power to issue clarification or advance ruling in regard to the CST rate or applicability has not been enabled under section 9 (2)².

Stage 20: Audit: The objective of introducing the Audit under the VAT laws of the State is a check on leakage of revenue. Dealers are expected to be compliant and ensure payment of proper taxes and filing of proper documents and statements.

A VAT Audit is a selective review of the tax payers books and records including year-end statements, balance sheet and profit and loss accounts, to ensure that the major areas of purchases, sales, and stocks are substantially correct, not that the taxpayers has filed a correct return. In course of this audit, the CST collected and paid, correctness of form C, E1-E2, F, H, I, issued and received by dealer may be reviewed and reported upon. This function has in some States been delegated to professionals like Chartered Accountants and others.

Conclusion:

The procedures under CST as observed are quite cumbersome and complex at times. Lack of awareness of the dealer, his consultant as well as the revenue officers at times can create avoidable demands. The following of proper procedures could protect the dealer to some extent. The measures to avoid disputes and resolve dispute has been covered in the chapter on Assessment. Dealers may find that the compliance would result in comfort as well as saving in costs, while ensuring that the benefits available are taken fully.

CHAPTER 3

Historical Background

A dealer or a professional who is new to CST is often confronted with the question about whether there is an interstate sale of goods. Further how does the liability arise and what would be the quantum of liability. Are there any exemptions or any set off of taxes paid on inputs or capital goods available?

Historical Background

We had taxes in India more than 3000 years back. The treatise by Kautilya titled Arthashatra spells out levy of various types of taxes on activities and events.It explained when and how taxes need to be collected by the kings.

In 1937 the British formed princely States in India introduced sales tax. This was continued in Government of India Act, 1935, the British law to govern India.

During pre-independence era, the Government of India Act, 1935 empowered the provinces to levy a tax on the sales of goods, by including Entry 48 in List II of its Seventh Schedule which read as "Taxes on sale of goods and on advertisements". There was no specific provision for the levy of tax on interstate sale of goods but each Province had laid down their own definition of sale in its law of sales tax to cover interstate transaction by having some connection. This led to multiple taxation of the same transaction by different Provinces as well as disputes. Traders were encouraged to move goods clandestinely without documents to safeguard their margins. Some used one document for several movements with complicity of check post officers, a practice which continues even today.

Legislative Background of CST

Sales tax is one of the important indirect taxes for purpose of taxation by State Government. The States are to collect the sales tax. The collection from sales tax goes to State from where the movement of goods starts. The tax on interstate sale is only by the law of parliament i.e. Union (Central) Government.

Constitution and CST

The Constitution of India provides for powers to make laws for ourselves including the taxation laws. It further provides that no law can trample on the fundamental rights conferred on any person. Some of the main articles provide equality before law or equal protection of laws in India [ Article 14], protection of rights to freedom of speech [ Article 19], no tax to be imposed or collected except by authority of law [Article 265] among many others.

When the Constitution of India came into force on 26th January 1950, Article 286 thereof provided that a State cannot impose a tax on the sale or purchase of goods taking place outside its territory or in the course of import into or export out of the territories of India and only parliament can, by law, provide for a law of a State imposing tax on the interstate sales or purchases of goods.

Why was CST enacted?

The President of India was empowered to direct that such levies including sales tax previously made by the Provinces could continue to remain in force till 31st March 1951 and he did so by the Sales Tax Continuance Order, 1950 dated 26th January 1950.

While it was clear that tax on interstate sales or purchases of goods could not be taxed by a State after 31st March 1951 except by a Central legislation permitting it to do so, there was an Explanation that existed under clause (1) of Article 286 which read as under :-

Explanation: For the purpose of sub-clause (a) a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in the State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason if such sale or purchase passed in another State.

There were some issues which arose after the Constitution was enacted. There were more than one State having ‘territorial nexus’ with sale transaction. The contract of sale of goods may take place in one State, goods maybe delivered from another State and the property in goods may pass to buyer in third State.

The Theory of nexus was approved. Supreme Court had held that it is not necessary that all the ingredients of transaction of sale should take place in same State for levying tax. This led to more than one State trying to tax the same transaction by relying on one of the ingredients of sale taking place in their State. This led to double levy of tax on the same transaction³.

At that time goods were not taxable unless they were delivered for consumption in the State. It was a destination based tax. Therefore there was no tax on the intermediate sales within a State.

In 1952 Bombay State enacted the sales tax law and rules which allowed it to levy tax on interstate sales. This law was challenged and Supreme Court held that no tax could be collected if goods delivered to another State⁴. This destination based levy adversely affected net exporting States like Bihar and Orissa and the disparity among the States increased. Richer States became richer and the poor ones poorer. States started to establish territorial nexus with the goods such as origin, location of goods, buyer/seller location resulting in State of origin as well as State of destination taxing the same goods. This led to widespread confusion as well as restricted movement of goods within India. The evasionary practice of moving goods without invoices and across the borders started increasing. Some dealers started moving multiple consignments with only invoice at time with connivance with checkpost officers.

In the Bengal Immunity decision the SC set out the following principles:

1. Sales outside the State were not to be taxed.

2. Imports and Exports were not to be taxed.

3. Unless the Parliament authorizes, the States cannot impose tax on sale or purchase of goods when sale takes place in course of interstate trade or commerce.

4. Declared goods were to be protected from State levies⁵.

The Court further held that till law was passed by Parliament permitting the State to tax interstate sales, no State law could impose tax on such transactions after 31st March 1951. The States were ordered by the Supreme Court to refund the excess taxes while a tax enquiry committee was formed to look into the difficulties of the States.

This resulted in a huge financial difficulty as the tax collected on interstate sale was held to be illegal and refundable. This was overcome by promulgating an ordinance by President on 30.1.56 validating all the tax collections made by States from 1.1.51 till 6.9.55. This Ordinance was later converted into the Act.No tax on interstate transactions could be levied by any State after such date.

Constitutional Amendment to Enable Tax

The Constitution was amended by the Sixth Amendment from 11th September 1956 so as to make the following changes:-

1. A new Entry 92A was inserted in the Union List in the Seventh Schedule so as to specifically empower the parliament to levy taxes on interstate sales or purchases of goods (other than newspaper covered by Entry 92),

2. Entry 54 in the State List of the schedule was made subject to Entry 92A of the Union List, so that a State cannot levy tax on interstate transactions at all

3. Article 269 was amended so that taxes on interstate sales or purchases of goods levied by the Centre could be collected and retained by the States, and the Central law could formulate the principles for determining when an interstate sale or purchase of goods takes place,

4.Article 286 was amended to vest the power with the parliament to make a law for laying down the principles for determining when a transaction is outside a State and when it is in the course of import/ export, so that no State could tax these transactions. Provision was also made in this Article for the Central law imposing restrictions or conditions on the taxation of sales or purchases of declared goods.

Consequent to theamendments, the Central Sales Tax Act, 1956 was passed by Parliament on 21st December 1956.

In terms of the Article 269, read along with Section 9(3) of this Act, the proceeds of the tax levied under this Act would accrue to the States, which collect them on behalf of the Centre. States would retain the collections made by them.

Territorial Jurisdiction and CST